Indian Banking System: Structure and other Details!

Bank is an institution that accepts deposits of money from the public. Anybody who has
account in the bank can withdraw money. Bank also lends money.

Indigenous Banking:
The exact date of existence of indigenous bank is not known. But, it is certain that the old
banking system has been functioning for centuries. Some people trace the presence of
indigenous banks to the Vedic times of 2000-1400 BC. It has admirably fulfilled the needs
of the country in the past.

However, with the coming of the British, its decline started. Despite the fast growth of
modern commercial banks, however, the indigenous banks continue to hold a prominent
position in the Indian money market even in the present times. It includes shroffs, seths,
mahajans, chettis, etc. The indigenous bankers lend money; act as money changers and
finance internal trade of India by means of hundis or internal bills of exchange.

Defects:
The main defects of indigenous banking are:
(i) They are unorganised and do not have any contact with other sections of the banking
world.

(ii) They combine banking with trading and commission business and thus have
introduced trade risks into their banking business.

(iii) They do not distinguish between short term and long term finance and also between
the purpose of finance.

(iv) They follow vernacular methods of keeping accounts. They do not give receipts in
most cases and interest which they charge is out of proportion to the rate of interest
charged by other banking institutions in the country.

Suggestions for Improvements:

(i) The banking practices need to be upgraded.
(ii) Encouraging them to avail of certain facilities from the banking system, including the
RBI.

(iii) These banks should be linked with commercial banks on the basis of certain
understanding in the respect of interest charged from the borrowers, the verification of
the same by the commercial banks and the passing of the concessions to the priority
sectors etc.

(iv) These banks should be encouraged to become corporate bodies rather than
continuing as family based enterprises.

Structure of Organised Indian Banking System:

The organised banking system in India can be classified as given below:

Reserve Bank of India (RBI):

The country had no central bank prior to the establishment of the RBI. The RBI is the
supreme monetary and banking authority in the country and controls the banking system
in India. It is called the Reserve Bank as it keeps the reserves of all commercial banks.
Commercial Banks:
Commercial banks mobilise savings of general public and make them available to large
and small industrial and trading units mainly for working capital requirements.

Commercial banks in India are largely Indian-public sector and private sector with a few
foreign banks. The public sector banks account for more than 92 percent of the entire
banking business in Indiaoccupying a dominant position in the commercial banking. The
State Bank of India and its 7 associate banks along with another 19 banks are the public
sector banks.

Scheduled and Non-Scheduled Banks:

The scheduled banks are those which are enshrined in the second schedule of the RBI Act,
1934. These banks have a paid-up capital and reserves of an aggregate value of not less
than Rs. 5 lakhs, hey have to satisfy the RBI that their affairs are carried out in the interest
of their depositors.

All commercial banks (Indian and foreign), regional rural banks, and state cooperative
banks are scheduled banks. Non- scheduled banks are those which are not included in the
second schedule of the RBI Act, 1934. At present these are only three such banks in the
country.

Regional Rural Banks:

The Regional Rural Banks (RRBs) the newest form of banks, came into existence in the
middle of 1970s (sponsored by individual nationalised commercial banks) with the
objective of developing rural economy by providing credit and deposit facilities for
agriculture and other productive activities of al kinds in rural areas.

The emphasis is on providing such facilities to small and marginal farmers, agricultural
labourers, rural artisans and other small entrepreneurs in rural areas.

Other special features of these banks are:

(i) their area of operation is limited to a specified region, comprising one or more districts
in any state; (ii) their lending rates cannot be higher than the prevailing lending rates of
cooperative credit societies in any particular state; (iii) the paid-up capital of each rural
bank is Rs. 25 lakh, 50 percent of which has been contributed by the Central Government,
15 percent by State Government and 35 percent by sponsoring public sector commercial
banks which are also responsible for actual setting up of the RRBs.

These banks are helped by higher-level agencies: the sponsoring banks lend them funds
and advise and train their senior staff, the NABARD (National Bank for Agriculture and
Rural Development) gives them short-term and medium, term loans: the RBI has kept CRR
(Cash Reserve Requirements) of them at 3% and SLR (Statutory Liquidity Requirement) at
25% of their total net liabilities, whereas for other commercial banks the required
minimum ratios have been varied over time.

Cooperative Banks:
Cooperative banks are so-called because they are organised under the provisions of the
Cooperative Credit Societies Act of the states. The major beneficiary of the Cooperative
Banking is the agricultural sector in particular and the rural sector in general.

The cooperative credit institutions operating in the country are mainly of two kinds:
agricultural (dominant) and non-agricultural. There are two separate cooperative agencies
for the provision of agricultural credit: one for short and medium-term credit, and the
other for long-term credit. The former has three tier and federal structure.

At the apex is the State Co-operative Bank (SCB) (cooperation being a state subject in
India), at the intermediate (district) level are the Central Cooperative Banks (CCBs) and at
the village level are Primary Agricultural Credit Societies (PACs).

Long-term agriculture credit is provided by the Land Development Banks. The funds of the
RBI meant for the agriculture sector actually pass through SCBs and CCBs. Originally based
in rural sector, the cooperative credit movement has now spread to urban areas also and
there are many urban cooperative banks coming under SCBs.
Internet banking is the latest and the cheapest technology introduced in the banking
industry. It is acknowledged that the internet has already had a profound effect on
delivery of financial services and this likely to bring more radical changes. At the basic
level, interknit banking can mean the setting u of a web-page by a bank to give
information about its products and services. At an advance level, it involves provision of
facilities such as accessing accounts, fund transfer, and buying financial products or
services online. This is called Transactional Online Banking.
In general Internet Banking refers to the use if internet as a delivery channel for the
banking services, including traditional services, such as opening an account or transferring
funds among different accounts, as well as new banking services such as electronic bill
presentation and payment which allows the customers to pay and receive the bills on a
banks website.
There are two ways to offer Internet Banking. First, an existing bank with physical
offices can establish a web-site and offer internet banking in addition to its traditional
delivery channel. Second, a bank may be established as a branchless, Internet only, or
Virtual bank. Further internet banking sites offer financial services products to customer
in three basic formats
Information Only: Informational only presents online information about the
different banks services and products to the customers as well as general public and may
include unsecured e-mail contract, with no customer identification or verification
required.
Information Exchange: Information Exchange Customer Information such as name,
address and account information may be collected or displayed, with possible secure e-
mail and/or data transfer, with verification of customer identification required. No
financial transactions are to be made.
Transactional: Transactional customer account information enquiry, financial
transactions such as transfer of funds, payment of bill, application for loans and a variety
of other financial transactions, with strong customer authentication required.
When it was introduced for the first time, Internet Banking was used mainly as an
information presentation medium in which banks marketed their products and services on
their web sites with the development of asynchronous technologies; however more banks
have come forward to use internet banking both as a transactional as well as an
informational medium.
A successful Internet Banking solution offers:
Exceptional rate on savings CDs, and IRAS.
Checking with no monthly fee, free bill payment and rebates on ATM surcharges.
Credit card with low rates.
Easy online applications for all accounts, including personal loans and mortgages.
24 hours account access.
Quality customer service with personal attention.
 Internet banking is a cost-effective delivery channel for financial institutions. All the
transactions are encrypted, using sophisticated multi-layer security architecture, including
fire walls and filters. Firewall is a protection device to shield a vulnerable area from some
form of danger. In Internet, a firewall system set up specifically, to shield a web from
outside. Typically, this allows insiders to have full access to services on the outside, while
granting access into the internal system, selectively based on log-in-name and password.
Internet banking is somewhat different from PC banking. PC banking is transactions
through PC at ones office or home, which is connected to the branch through a modem.
PC banking is available only when branch is open and is available only through any PC.
But, internet banking enables to do the same through any PC connected to the internet,
from anywhere in the world.
Advantages of Internet Banking
Anywhere and anytime banking as services are provided round the clock.
Worldwide connectivity as it transcends geographical boundaries.
Easy access to recent and historical data.
Direct customer control of international movement of funds.
Greater processing speed and accuracy.
Credit Cards
There are various ways of making payment through the banking system. These include
cheques, direct debits, bank drafts, electronic transfer, international money orders, letters
of credit, etc. Increasing affluence combined with increasing complexity of life has led to
the phenomenon of Credit Cards. They provide convenience and safety in the purchasing
process. It is generally known as plastic money. The credit card are made of plastic is
widely used by the consumers all around the globe. The changes in consumer behavior
and tastes led to the tremendous growth of credit cards. Credit card is a card which
enables the consumers to purchase products or services without paying immediately. This
credit concept is based on the principle of Buy now pay later. Credit card is a document
that can be used for purchase of goods and services all over the globe.
The worlds first credit card was issued by Mobil in 1940. This card was initially issued
by the Company to give specialized services to its regular customers. It helped to boost
sales and increase the customer base. After the tremendous success of Mobil card various
organisations began to think about the use of cards in different segments of the business.
The Diners Club, American Express and Carte Blanche Cards have emerged. The credit
cards were popularly known in USA. During the second World War US saw the growth of
the credit cards. The first bank card was issued by Fanklin National Bank, USA in the year
1952. In 1960, the credit card operating system was developed by Bank of America, USA.
An international bank card system known as VISA International was established.
Another international bank card system called Mastercard was established. At present
the market is dominated by the VISA and Master Card. In the year 1988, the first woman
card was launched My Card by international bank of Asia in HongKong.
The credit cards are made of plastic. It is widely used by the consumers all around the
globe in the digital economy. The card identifies its owner. The owner of the card is
entitled to purchase the goods without cash. It provides purchase services without money
and be eligible to get credit from a number of merchant establishments. The issuer of the
card issues credit cards depending on the credibility of the customers. The card issuer
enters into a tie up with different merchant vendors located indifferent geographical
places in various fields of business activities. The card issuer will put up a credit limit for
its card holders and a ceiling limit for each vendor. The card offers the card holder an
opportunity to buy air, rail tickets and stay at hotels for payments. The card holder need
only to present the card at the cash counter and has to sign some firms. The credit cards
can be considered as a substitute for cash and cheques. The cards are not accepted by all
the merchant vendors.
Process of Credit Card Business Cycle
Credit cards facilitate its holder to make purchases at various designated merchant
establishments. The establishments like travel agencies. Star hotels, Departmental stores
will accept all valid cards in lieu of cash payments. The card holder can avoid the risk of
carrying cash. The following steps are involved in the process of a transaction.
Step I: a card holder purchases goods and present the credit card to the designated
merchant establishment.
Step II: The retail vendor verifies the number on the card against the hot list provided to
him by the bank.
Step III: The card holder is required to sign on the voucher and the signature has to tally
with the one on the credit card.
Step IV: The Retailer has to present the sales vouchers to the bank for reimbursement for
the customers purchases. The bank also charges commission from the retailer.
Step V: The bank will make payment to the retailer on behalf of the card holder.
Step VI: After completion of the process. The bank sends the bill to the card holder and
received the money.
Benefits of the Credit Cards
The benefits of credit cards may be classified into two categories:
(A) Benefits to the Card Holders: There are so many benefits to the card holders for using
the cards:
The card holder need not to carry cash at all times.
The card holder will be covered by free insurance.
The card can be used as identification card in some situations.
The issuer of card offers rewards and gifts to the card holder.
The card holders can avail special counters for Air and Travel reservations.
The card holder can get complimentary magazines. For example, diners club provide
signature magazine to card holders.
Family members of the card holder can avail this facility.
 The card holder can enjoy free credit uto 30 to 45 days.
If the credit card is lost/stolen the liability is limited to a maximum of one thousand
rupees.
Some credit holders will get free services such as confirmed ticket booking and hotel
reservations.
Some card holders will get benefit from the world wide network, for example,
Master card, Amex, Visa etc.
(B) Benefits to the Card Holders: There are also advantages to credit issuers. Such
advantages are such as:
This business offers higher profits.
The issuers can also improve their name and image by serving large number of credit
card holder base.
This business is an additional activity in the banking sector to enhance their
profitability.

(c ) Additional Facilities: The credit cards besides providing credit facility, the issuer extend
some additional facilities to attract more customers. These facilities and services are
presented below
a) Incidental Expenses: The credit card holders can use their cards to pay for incidental
expenses. They have to do is to call the issuer bank and instruct it to make payment like
telephone bills, electricity bills, payment to mutual funds, public issues etc.
b) Instant cash Withdrawal: Some issuers allows their credit card holder to withdraw
instant cash up to 60 percent of his credit line from ATMs in all metros. The card holders
can also draw cash in case of medical emergencies for meeting expenses on treatment at
other than their home town. This emergency medical advance facility is available with all
Indian and foreign banks.
c) 24 7365 Customer Service: The technology adopted by the banking sector makes
comfortable life to the customers. The revolutionary phone banking service ensures that
the banks are just a phone call away to assist the card holders around the clock. Foreign
banks provide a world class service to card holders. A credit card holder can call
Citiphone banking and ask for temporary credit line any time.
d) Free insurance: Some of the issuers, insures the card holder at free of cost for a
particular sum. Citibank offer a complimentary personal accident insurance. The Bank of
Baroda card extends insurance protection to card holders spouse also.
e) Buy Anything on Credit Card: The credit cards are well accepted by the public. The
card can be used for all occasions and seasons. The card is also useful for purchasing
essential commodities like groceries, fuel, auto accessories and cosmetics. The cards are
useful even passing customs duties and hospital bills. We can purchase everything,
anywhere at any time under the sum at designated locations.
f) Joint Credit card and ATM Facility: Indian banks and foreign banks have introduced a
joint card. The joint card holder can access his accounts with the bank through ATMs.
g) Hotel Discount Facility: The credit holders are entitled to get discounts at all leading
hotels and clubs. The card holders are eligible to avail the facilities as per the schemes
which were offered by the hotels, travel agencies and on air ticket. Even the consumer
products are also available in this method.
h) Fuel Facility at Petrol Pumps: The BOB, Citibank, Standard Chartered cards are
accepted at all Bharat petroleum outlets. This is very convenient foe card holders at all
leading metro cities.
i) Purchase Protection: The credit card facility protects the purchases against damage
or loss due fire and theft. For compensation the card holder can claim the value of the
product damaged or lost from The New India Assurance Company. This protection is
available for a limited period from the date of purchase of the product on the credit card.
Some of these facilities are exclusive offers, airport lounges, special hospital facilities,
special travel services.
Types of Credit Cards
The credit card system is becoming very popular in India and abroad. The system
facilitates a wide range of products and services. The growth of service sector depends on
the pulse of the customer. The needs of the customers are taken care off by different card
issuers. The credit cards can be classified into 4 basic types based on the issuers: Travel
and entertainment card, bank card, retail card, fuel card. There are many types of cards
which are popular in India and abroad. These cards can also be classified as follows:
a) Based on Geographical Territory: Under this category, the credit cards can be
categorised as Domestic cards and International cards. The domestic cards are generally
available from most of the banks. These cards will be valid in India and Nepal only. All the
transactions will be in rupees only. International cards will be issued to persons who
travel foreign countries frequently. These cards are subject to the rules and regulations of
the RBI. These cards will be honoured in throughout the world except in India and Nepal.
b) Based on Franchise: The credit cards can be classified based on the tie-ups. They are
Visa card, Master card, Proprietary card and tie-up card. Visa card can be issued by any
bank which is having tie-up with VISA international USA. The card holder can avail the
facilities of Visa network for their transitions. Master card is a brand name for another
type of credit card. The issuer of the card has to obtain permission from the master card
corporation of USA. It will be honoured in the master card network Proprietary card will
be issued by the issuer bank on their own brand name. These cards will be issued by banks
in addition to their other tie-up cards. Tie-up cards are issued by banks having a
collaboration with domestic card brands.
c) Based on Status: This type of credit cards will be further classified as standard cards,
business cards and gold card. The standard card is a normal card generally issued by all
issuing banks. The card holder is offered limited privileges when compared to the other
cards. These cards are issued by some banks under the brand name of classic card.
Business card is meant for tax consultants, chartered accountants, small firms, solicitors
and executives etc. These cards are very useful for their business trips more and more
convenient. The business card facilitates more privileges than the standard card. Some
banks are issuing these cards in the brand name of executive.
d) Based on User: Under this category the credit cards are further classified as Individual
cards and corporate cards. The individual cards are issued to individual persons. All the
brands of cards will be given to individual corporate cards are issued to corporate
companies and business firms only. The corporate cards are issued on the name of the
company. The cards will be utilized by the executives and top officials the firms. The bills
will be paid by the company to the banks.
e) Based on Credit Recovery: These type of cards are again classified into two categories.
They are Revolving credit type card and charge card. The revolving credit card is generally
based on the revolving credit principle. According to this scheme, the card holder has to
pay a percentage of the outstanding credit for every month. The interest is charged on the
outstanding. The interest rate is charged on the outstanding amount. The interest rate is
more than 30 percent per annum charge card is a convenient instrument. The issuer gives
a consolidated bill for every month to the card holder. The card holder shall pay the bills
on presentation of the consolidation bills. Therefore, there are no interest charges on this
use of cards.
Credit Cards in India
The first credit card in India was Diners club card in the year 1964. Andhra Bank and
Central bank were the first to launch credit cards among the commercial banks. The
Andhra bank introduced the card in the year 1981 under the brand name of Visa classic
followed by Central bank of India in collaboration with Master Card Corporation in 1981.
The other banks Canara bank, bank of India and Bank of Baroda introduced credit cards in
India. The foreign banks such as Citi bank, Standard Chartered bank, Bank of America and
American Express bank have also introduced cards in India through their branches in
India.
Smart cards
Smart card is a little plastic card. It is just like a credit card but it contains a micro-
processor and a storage unit. This card is developed with latest technology and it is an
innovation that overcomes all limitations. They are more expensive. The stored data is not
exposed to physical damage. These cards can store at least 100 times more data than
magnetic strip cards. They are more popular in Europe. They are categorized in two kinds;
memory smart cards and intelligent smart cards. Memory card contains less information
and processing capabilities they are used to record a monetary or unit value for a specific
amount. Intelligent cards contain more information and process a wider variety of
information components than a memory smart card. This card also has greater processing
capabilities for programmed decision making for various applications. The electronic purse
is used to refer to monetary value, that is loaded on to the smart cards microprocessor
and that can be used by consumer for purchase. The merchants, who are accepting the
cards, must have a smart card reader. The smart card technology may be used in either an
online or offline mode as with magnetic strip cards. Offline card technology can be used in
underdeveloped countries. The functioning of offline smart cards as presented below:
Step 1: Smart card holder inserts card into machine and downloads money from bank as
to microprocessor on the card.
Step 2: The consumer pays for merchandise/ service by inserting smart card into
merchants smart card reader.
Step 3: The merchants smart card reader records the transaction.
Step 4: At the end of the day, the merchant inserts a smart card to receive download of
the days sales.
Step 5: Take to bank for credit for days sale for cash.
Smart cards used in place of cash have the advantage of providing an electronic record for
purchases and the ability to printout transaction data which can serve as receipts.
The smart card holder inserts his card into smart card reader enter a valid password and
the amount of the purchase is deducted from the balance from the balance on the card.
The card reader computes a running total of the sales amounts deducted from the
customers. The smart card can be taken to the bank for immediate cash payment. If the
merchant has a networked personal computer and banking software then it may insert
the smart card and transfer the amount on the smart card directly into a bank account.
The telephone manufacturers are introducing smart card phones that can be used for a
variety of purposes. The phones can be used to:
i. Pay for items purchased over the phone,
ii. Download money from bank accounts to a smart card,
iii. Transfer balances between accounts, and
iv. Check bank balances.
Debit Card
Debit Card is the innovative instrument in the financial services sector. It is the most
convenient method of payment to the merchant establishment. It needs involvement of
many banks. The card holder will present the card on completion of his purchases at the
merchant establishment on production of a debit card. The card details are fed through a
terminal at the merchants establishment. The card holder is immediately debited from
the card holders account and transferred to the account of merchant establishment. No
overdrawing is allowed in the case of debit card. A debit card is the variant of an ATM
card. It has the following features:
i. Whereas an ATM card can be used only where the ATMs are provided by the
banks, and that too only for cash withdrawals, the debit card can be used in any
merchant outlet that is linked with the customers bank for making payment.
ii. Credit card is issued to clients after a proper assessment of their credit standing.
But for a debit card holder there is no need to make such an assessment.
iii. At the time of making payment through a debit card, the amount is instantly
debited to the customers account unlike payment made through the credit card
where the account of the customer is debited after a certain period.
iv. Debit card freeze the cardholder from carrying cash for his/her purchases.
 v. Debit card is like a blank cheque, so it must be used carefully otherwise an
unscrupulous person can wipe the entire balance in the bank account of the
holder.
vi. There are no chances of the debit card user to fall into the debt trap, since
payment is immediately debited to his account, as he can only use the money
which is available in his account.
vii. There are no transaction costs and no question of late fee payment in the use of
debit card.
viii. Bankers also avoid the risk of bad debts.
Demand Deposit'
A demand deposit consists of funds held in an account from which deposited funds can be
withdrawn at any time from the depository institution, such as a checking or savings
account, accessible by a teller, ATM or online banking. In contrast, a term deposit is a type
of account that cannot be accessed for a predetermined period of time. M1 is a category of
the money supply that includes demand deposits as well as physical money
and negotiable order of withdrawal (NOW) accounts that have no maturity period but
limited withdrawals or transfers.

Characteristics of Demand Deposit Accounts

Demand deposit accounts (DDAs) may have joint owners. Both owners must sign when
opening the account, but only one owner must sign when closing the account. Either owner
may deposit or withdraw funds and sign checks without permission from the other owner.

Financial institutions typically create minimum balances for demand deposit accounts.
Accounts falling below the minimum value typically are assessed a fee each time the
balance drops below the required value.

CASA
A CASA operates like a normal bank account in which funds may be utilized at any time.
Because of this flexibility, a CASA has a lower interest rate than a term deposit as the
bank does not have a guarantee all the funds are available to loan for a specific period of
time. Demand deposits like a CASA exchange a higher rate of interest for higher liquidity
and access to funds. The amount of money deposit into a CASA is an important metric to
determine the profitability of a bank.

Use of a CASA is only functional under the assumption that depositors will not withdraw
all funds in the very near future. Likewise, because of the uncertainty relating to when a
depositor will withdraw funds, a CASA is not to be utilized by a bank for long-term
financing.

How Banks Utilize a CASA

Financial institutions encourage the use of a CASA as it results in a higher profit
margin for the bank. Because the interest paid on the deposits is lower when compared
 to a term deposit, the banks net interest income (NII) is greater. Thus, a CASA is a
cheaper source of funding for financial institutions.

CASA Ratio
The CASA ratio indicates how much of a banks total deposits are in current and savings
accounts. A higher ratio means a larger portion of a banks total deposits are in current
and savings accounts. For a bank, this is favorable as the institution is getting money at
low cost. Therefore, the CASA ratio is a reflection of a banks profitability or likelihood of
generating profit as it is an indicator of the expense to raise funds.

It is a market purely for short-term funds or financial assets called near money.
It deals with financial assets having a maturity period upto one year only.
It deals with only those assets which can be converted into cash readily without loss &
With minimum transaction cost
Generally transactions take place through phone i.e., oral communication. Relevant
documents & written communications can be exchanged subsequently. There is no
formal place like stock exchange as in the case of a capital market.
Transactions have to be conducted without the help of brokers.
It is not a single homogeneous market. It comprises of several submarkets, each
specialising in a particular type of financing like

Call Money Market/Acceptance Market/ Bill Market etc