UNIT 1 INTRODUCTION TO BANKING BUSINESS: Banking sectors: 1.

Retail banking
Overview:
Over recent years the retail banking market has changed dramatically, with banks today facing growing competition from a diverse range of brands and service providers. In order to compete, banks need the ability to adapt and respond to this ever changing environment and differentiate themselves from the competition. Many banks continue to support legacy core banking systems, which are costly to maintain, and provide an inflexible infrastructure inhibiting the banks ability to innovate. Temenos understands how technology can be used to create differentiation, and provide our customers with an environment that enables innovation and supports business growth Retail banking refers to banking in which banking institutions execute transactions directly with consumers, rather than corporations or other banks. Services offered include: savings and transactional accounts, mortgages, personal loans, debit cards, credit cards, and so forth. What Does Retail Banking Mean? Typical mass-market banking in which individual customers use local branches of larger commercial banks. Services offered include savings and checking accounts, mortgages, personal loans, debit/credit cards and certificates of deposit (CDs). Retail banking aims to be the one-stop shop for as many financial services as possible on behalf of retail clients. Some retail banks have even made a push into investment services such as wealth management, brokerage accounts, private banking and retirement planning. While some of these ancillary services are outsourced to third parties (often for regulatory reasons), they often intertwine with core retail banking accounts like checking and savings to allow for easier transfers and maintenance.

Types of retail banks

Commercial bank: the term used for a normal bank to distinguish it from an investment bank. After the Great Depression, the U.S. Congress required that banks only engage in banking activities, whereas investment banks were limited to capital market activities. Since the two no longer have to be under separate ownership, some use the term "commercial bank" to refer to a bank or a division of a bank that mostly deals with deposits and loans from corporations or large businesses.

Community banks: locally operated financial institutions that empower employees to make local decisions to serve their customers and the partners. Community development banks: regulated banks that provide financial services and credit to under-served markets or populations. Credit unions: not-for-profit cooperatives owned by the depositors and often offering rates more favorable than for-profit banks. Typically, membership is restricted to employees of a particular company, residents of a defined neighborhood, members of a certain labor union or religious organizations, and their immediate families. Postal savings banks: savings banks associated with national postal systems. Private banks: banks that manage the assets of high net worth individuals. Historically a minimum of USD 1 million was required to open an account, however, over the last years many private banks have lowered their entry hurdles to USD 250,000 for private investors.[citation needed] Offshore banks: banks located in jurisdictions with low taxation and regulation. Many offshore banks are essentially private banks. Savings bank: in Europe, savings banks took their roots in the 19th or sometimes even in the 18th century. Their original objective was to provide easily accessible savings products to all strata of the population. In some countries, savings banks were created on public initiative; in others, socially committed individuals created foundations to put in place the necessary infrastructure. Nowadays, European savings banks have kept their focus on retail banking: payments, savings products, credits and insurances for individuals or small and medium-sized enterprises. Apart from this retail focus, they also differ from commercial banks by their broadly decentralised distribution network, providing local and regional outreachand by their socially responsible approach to business and society. Building societies and Landesbanks: institutions that conduct retail banking. Ethical banks: banks that prioritize the transparency of all operations and make only what they consider to be socially-responsible investments. A Direct or Internet-Only bank is a banking operation without any physical bank branches, conceived and implemented wholly with networked computers.

Retail banking in Polaris software labs:

The Retail Banking environment today is changing fast. The changing customer demographics demands to create a differentiated application based on scalable technology, improved service and banking convenience. Higher penetration of technology and increase in global literacy levels has set up the expectations of the customer higher than never before. Increasing use of modern technology has further enhanced reach and accessibility. The market today gives us a challenge to provide multiple and innovative contemporary services to the customer through a consolidated window as so to ensure that the banks customer gets Uniformity and Consistency of service delivery across time and at every touch point across all channels. The pace of innovation is accelerating and security threat has become prime of all electronic transactions. High cost structure rendering mass-market servicing is prohibitively expensive.

Present day tech-savvy bankers are now more looking at reduction in their operating costs by adopting scalable and secure technology thereby reducing the response time to their customers so as to improve their client base and economies of scale. The solution lies to market demands and challenges lies in innovation of new offering with minimum dependence on branches a multi-channel bank and to eliminate the disadvantage of an inadequate branch network. Generation of leads to cross sell and creating additional revenues with utmost customer satisfaction has become focal point worldwide for the success of a Bank. Retail Banking solution centre [BSC-1] in Polaris has established itself as a "One-stop solution for Retail Banking" to cater to the customers with a aim to create a sustainable profitable core proposition. Our Major Offerings

Retail Banking solutions and services. Credit cards Internet Banking. Mortgages practice. Multi-Channel Integration. Business Rule Engine. Customer Relationship Management. ATM Solutions and services

Key Benefits Associated with Polaris Offerings:

On-line, real time processing and cost saving thru Multi channel Transactions. Relationship banking enabled through extensive mining of all customer transactions. Rapid time-to-market with new product and service offerings. Rapid Customer Acquisition. Multi-currency and multi-language support so as to ensure geographic reach across continents. Multi-layer security, monitoring and reporting. Seamless integration with advanced delivery systems including teller and branch automated teller machine (ATM), point-of-sale (POS), interactive voice response, corporate and home banking Modular interfaces to other systems with a Plug-in approach.

2.Corporate Banking
Definitions:
Financing (often unsecured), cash management, and other banking services custom-tailored for corporations. Corporate banking relies primarily on an individual approach to every customer. Appointing specialized teams for customer service is necessary not only because of the individual approach to each customer, but also due to the broad range of products and services. These include servicing and handling domestic financial transactions, managing a companys current liquidity, servicing and financing transactions in foreign trade, investment of financial surplus, financing a companys development and investment projects, guaranteeing trade transactions, managing the financial market, investing on capital markets, as well as providing trust services, financial consulting, e-banking services and credit cards. Corporate banking typically refers to financial services offered to large clients ('wholesale clients'). Although many wholesale clients are large corporations, they may also include other institutions like pension funds, governments and other (semi-) public entities. Corporate banking is a very profitable division for banks, far more profitable than retail banking, which is aimed towards households and small and medium enterprises (SME's).

Corporate Banking overview:

Corporate Banking team provides a single access point, for global corporate and institutional clients, to the full breadth leading financial services capabilities. Along side Global Investment Banking colleagues, Corporate Banking works closely with clients to provide strategies to help achieve their business and financial objectives and facilitate seamless execution of those strategies. Based on client needs and objectives, Corporate Banking offers a full range of leading capital markets financial services including:

Raising capital - through the bank, and debt and equity capital markets,corporate banking provide a range of products and services including debt, private placements and securitizations Accessing markets - specialized market professionals provide clients with access to fixed income, equity, foreign exchange, commodity and hedge fund markets Mitigating risk corporate banking provide derivatives and structured products that allow clients to limit or enhance exposure to commodities, credit, equities, fixed income, foreign exchange and interest rates Corporate Banking team are also specialists in providing innovative credit solutions to clients. Industry expertise and seamless execution has made RBC Capital Markets a

leader in extending credit, either bi-laterally or on a syndicated basis. Click here for more information on our credit capabilities. Corporate Banking professionals' expertise is focused on key industry sectors across North America and around the globe, including:

Communications, Media & Entertainment Consumer Diversified Industries Energy Financial Institutions Group Forest Products Healthcare Mining & Metals Real Estate Technology U.S. Municipal Finance

HDFC (corporate banking): Corporate Banking reflects HDFC Bank's strengths in providing our corporate clients in India, a wide array of commercial, transactional and electronic banking products. We achieve this through innovative product development and a well-integrated approach to relationship management. We offer blue chip companies in India, a full range of client-focused corporate banking services, including working capital finance, trade and transactional services, foreign exchange and cash management, to name a few. The product offerings are suitably structured taking into account a client's risk profile and specific needs. Based on our superior product delivery, industry benchmark service levels and strong customer orientation, we have made significant inroads into the formal banking consortia of a number of Indian companies including multinationals, domestic business houses and prime public sector companies.

3.Rural Banking
Rural banking in India started since the establishment of banking sector in India. Rural Banks in those days mainly focused upon the agro sector. Today, commercial banks and Regional Rural Banks in India are penetrating every corner of the country are extending a helping hand in the growth process of the rural sector in the country. Rural banking in India started since the establishment of banking sector in India. Rural Banks in those days mainly focussed upon the agro sector.Banking Regulation Act,1949 brought cooperative banks and regional rural banks under the Reserve Banks jurisdiction, while amendments to the Reserve Bank of India Act. Regional Rural Banks (RRB)are Regulated by the Rural Planning and Credit Department of Government of India and supervised by NABARD. Regional rural banks in India penetrated every corner of the country and extended a helping hand in the growth process of the country.The Government of India set up Regional Rural Banks (RRBs) on October 2, 1975. The banks provide credit to the weaker sections of the rural areas, particularly the small and marginal farmers, agricultural labourers, artisans and small entrepreneurs. Initially, five RRBs were set up on October 2, 1975 which were sponsored by Syndicate Bank, State Bank of India, Punjab National Bank, United Commercial Bank and United Bank of India. Capital share being 50% by the central government, 15% by the state government and 35% by the scheduled bank. The total authorized capital was fixed at 1 crore which has since been raised to 5 Crore. Till date in rural banking in India, there are 14,475 rural banks in the country of which 2126 (91%) are located in remote rural areas.

Reform Process of Regional Rural Banks

RRBs started their development process with the formation of a single bank (Prathama Grameen Bank) on 2nd October 1975. There were 133 RRBs (post-merger) covering 525 districts with a network of 14,494 branches till 31 March 2006. RRBs were originally conceived as low cost institutions having a rural ethos, local feel and pro poor focus. However, within a very short time, most banks were making losses. The original assumptions as to the low cost nature of these institutions were belied. When the reform process in the banking sector was initiated, RRBs were taken up for a close look. The GoI in consultation with RBI and NABARD started the reform process through a comprehensive package for RRBs including cleansing their balance sheets and recapitalising them. Extant lending restrictions were removed and space and variety available for investment of their surplus funds was expanded.Simultaneously, a number of human resource development and Organisational Development Initiatives (ODI) were taken up by NABARD with funding support of the Swiss Development Corporation (SDC) and with the tools of training and exposure visits, ODI, technology support, computerization and use of IT, system development, etc. for business development and productivity improvement. By end March 2005, there was a remarkable improvement in the financial performance of RRBs as compared to the position prevailing in 1994-95. The number of banks reporting profits went up to 166 of the 196 RRBs. As on 31 March 2006, of the total 133 RRBs (post merger), 111 posted profits and 75 of these RRBs were sustainably viable organisations having no accumulated losses as also posting current profits. GoI initiated the process of structural consolidation of RRBs by amalgamating RRBs sponsored by the same bank within a State as per the recommendations of the Vyas

Committee (2004). The amalgamated RRBs were expected to provide better customer service due to better infrastructure, computerization of branches, pooling of experienced work force, common publicity / marketing efforts, etc. and also derive the benefits of a large area of operation, enhanced credit exposure limits and more diverse banking activities. As a result of the amalgamation, the number of RRBs was reduced from 196 to 133 as on 31 March, 2006 and to 96 as on 30 April 2007. Thus under the amalgamation process, 145 RRBs have been amalgamated to form 45 new RRBs. There are several concessions enjoyed by the RRBs by Reserve Bank of India such as lower interest rates and refinancing facilities from NABARD like lower cash ratio,lower statutory liquidity ratio, lower rate of interest on loans taken from sponsoring banks, managerial and staff assistance from the sponsoring bank and reimbursement of the expenses on staff training. The RRBs are under the control of NABARD. NABARD has the responsibility of laying down the policies for the RRBs, to oversee their operations, provide refinance facilities, to monitor their performance and to attend their problems.Earlier Reserve Bank of India had laid down ceilings on the rate of interest to be charged by these RRBs. However from August 1996 the RRBs have been granted freedom to fix rates of interest, which is usually in the range of 14-18% for advances.

Some of RRBs are:

(1) Madhya Bharat Gramin Bank (Madhya Pradesh, India) A joint venture of Government of India, State Bank of India & State Government of Madhya Pradesh. Madhya Bharat Gramin Bank is established on 30.06.2006 by amalgamation of 3 Regional Rural Banks sponsored by State Bank of India namely Damoh Panna Sagar Kshetriya Gramin Bank, Shivpuri Guna Kshetriya Gramin Bank & Bundelkhand Kshetriya Gramin Bank under the notification issued by Govt. of India (Ministry of Finance). These amalgamated RRBs were joint venture company established under Regional Rural Bank Act 1976 (23 of 1976). The capital structure consisted of Govt. of India (50%), State Bank of India (35%) & State Government of Madhya Pradesh (15%). The Head office of the bank is at Sagar (M.P.). The Bank is serving rural masses through its 221 branches covering 8 districts of state of Madhya Pradesh namely Sagar, Damoh, Panna, Shivpuri, Guna, Ashoknagar, Tikamgarh & Chhatarpur. (2) South Malabar Gramin Bank (Kerela, India) Established in December 1976, with Head Quarters at Malappuram, Kerala state in South India. Equity of Rs 1Crore held by Government of India (50%),Government of Kerala (15%) and Canara Bank (35%).Management expertise provided by Canara Bank, a leading Public Sector Bank. The Primary objective of the Bank is to finance farm & non-farm sectors and other employment generation programs. Operates in 8 Districts with, 229 Branches, 5 REGIONAL/Area offices. A staff strength of 1555. A Clientele base of nearly 2 million

depositors and one million borrower clients Rated as one of the World's 50 largest Micro Credit Institutions. A novel project "SNEHAGRAMAM" clubbing twin objective of Total Financial Inclusion and Money-lender-free villages launched. (3) Himachal Gramin Bank (Himachal Pradesh, India) The Bank came into existence on 23 December 1976, under the provisions of Section 3 of the Regional Rural Banks Act, 1976 (No. 21 of 1976) with its Head Office at Mandi (H.P.). The Bank is sponsored by Punjab National Bank. The Bank is incorporated as a Scheduled Bank in Schedule - II of Reserve Bank of India Act, 1934 and is authorized to affect banking transactions as permitted under section 5(b) of Banking Regulations Act, 1949.

4.International Banking:
One of the most remarkable features of post-war economic history has been the progressive internationalisation of banking. The big banks, which had previously concentrated primarily on their domestic markets, have set up a network of affiliates around the globe bringing them closer to potential depositors and borrowers all over the world. One central feature of this development bas been the emergence of an international banking sector, the so-called Euro-currency market, largely specialising in "across-the-border" business and enjoying far-reaching freedom from regulatory constraints and centralised mircroeconomic controls. The banks active in this international banking sector are essentially the same as those in the domestic markets but their Euro-currency business is usually kept apart from their domestic business by limiting the privileged regulatory status to transactions denominated in foreign currency. Banks domiciled in countries that do not grant such regulatory privileges, or banks in the United States, for which the US dollar, the principal currency denomination used in the Euromarket, is also the domestic currency, participate in the Euro-currency market largely through affiliates set up in places where regulatory and fiscal privileges are readily granted, although these affiliates are sometimes little more than an accounting fiction. The banks use the international banking sector mainly for wholesale business, liquidity management and funding operations. Besides transacting a substantial amount of business among themselves, their offices in the Euro-currency market take deposits from banks in the domestic markets, central banks, other public-sector entities and private entities. They use the proceeds for financing the affiliates in the national markets and for lending to other banks, to public-sector entities and to private firms, particularly those of international stature. As the Euro-currency market counts among its creditors and debtors residents of virtually every country in the world, it is a worldwide market in the truest sense of the term. Moreover, the transparency and integrating power of the market is supported by the predominant use of a single currency denomination, the US dollar. The economic advantages of the internationalisation of banking, and of the Euro-currency market in particular, are obvious. Competition between banks on an international scale has exerted pressure on them to lower their costs and to pioneer new financing techniques. Moreover, the Euro-currency market has reduced the segmentation into national markets of the global supply of savings and of the overall demand for credit and has thereby tended to improve

the allocation of scarce capital on a worldwide basis. By increasing the international mobility of capital, the market has enhanced - at times when there has been a reasonable degree of confidence in the existing exchange rate structure - the effectiveness of monetary policy as an instrument for marshalling international capital rows. It has boosted the amount of finance available for covering temporary balance-of-payments disequilibria or for long-run economic development needs. And, as a result of these various influences, it has added to international flows of trade and investment, thereby contributing to a higher level of world economic activity and growth. There are also, however, a number of problems and dangers. The increased international integration of money and capital markets has reduced national autonomy in the use of monetary policy for domestic purposes; this may he particularly hard to accept when the influences transmitted by the international banking sector are the result of policy failures in other countries. Moreover, it is feared that at times when macro-economic management in individual countries is not too firm, the very free availability of international financing may encourage policy stances that are not in the interests of the long-run stability of the world economy as a whole. Also, at times of currency unrest and unstable exchange rate expectations, when monetary policy loses its grip on international capital movements, the increased international mobility of capital may add to the magnitude of destabilising capital flows. Finally, the privileged regulatory status of the Euro-currency market may pose problems of equity and cause distortions of competitive conditions to the disadvantage of smaller banks and other firms with less ready access to the Euro-currency market. And, what may be worse, large banks can use their affiliates in the Eurocurrency market to evade the macro-economic or prudential constraints to which their business is subject at home. An offshore bank is a bank located outside the country of residence of the depositor, typically in a low tax jurisdiction (or tax haven) that provides financial and legal advantages. These advantages typically include:

greater privacy ( bank secrecy, a principle born with the 1934 Swiss Banking Act) low or no taxation (i.e. tax havens) easy access to deposits (at least in terms of regulation) protection against local political or financial instability

Advantages of offshore banking

Offshore banks can sometimes provide access to politically and economically stable jurisdictions. This will be an advantage for residents in areas where there is risk of political turmoil,who fear their assets may be frozen, seized or disappear (see the corralito for example, during the 2001 Argentine economic crisis). However it is often argued that developed countries with regulated banking systems offer the same advantages in terms of stability. Some offshore banks may operate with a lower cost base and can provide higher interest rates than the legal rate in the home country due to lower overheads and a lack of

government intervention. Advocates of offshore banking often characterise government regulation as a form of tax on domestic banks, reducing interest rates on deposits.

Offshore finance is one of the few industries, along with tourism, in which geographically remote island nations can competitively engage. It can help developing countries source investment and create growth in their economies, and can help redistribute world finance from the developed to the developing world. Interest is generally paid by offshore banks without tax being deducted. This is an advantage to individuals who do not pay tax on worldwide income, or who do not pay tax until the tax return is agreed, or who feel that they can illegally evade tax by hiding the interest income. Some offshore banks offer banking services that may not be available from domestic banks such as anonymous bank accounts, higher or lower rate loans based on risk and investment opportunities not available elsewhere. Offshore banking is often linked to other structures, such as offshore companies, trusts or foundations, which may have specific tax advantages for some individuals. Many advocates of offshore banking also assert that the creation of tax and banking competition is an advantage of the industry, arguing with Charles Tiebout that tax competition allows people to choose an appropriate balance of services and taxes. Critics of the industry, however, claim this competition as a disadvantage, arguing that it encourages a "race to the bottom" in which governments in developed countries are pressured to deregulate their own banking systems in an attempt to prevent the offshoring of capital.

Disadvantages of offshore banking

Offshore bank accounts are less financially secure. In a banking crisis which swept the world in 2008 the only savers who lost money were those who had deposited their funds in offshore branches of Icelandic banks such as Kaupthing Singer & Friedlander. Those who had deposited with the same banks onshore received all of their money back. In 2009 The Isle of Man authorities were keen to point out that 90% of the claimants were paid, although this only referred to the number of people who had received money from their depositor compensation scheme and not the amount of money refunded. In reality only 40% of depositor funds had been repaid 24.8% in September 2009 and 15.2% in December 2009. Both offshore and onshore banking centres often have depositor compensation schemes. For example The Isle of Man compensation scheme guarantees 50,000 of net deposits per individual depositor or 20,000 for most other categories of depositor and point out that potential depositors should be aware that any deposits over that amount are at risk. However only offshore centres such as the Isle of Man have refused to compensate depositors 100% of their funds following Bank collapses. Onshore depositors have been refunded in full regardless of what the compensation limit of that country has stated thus banking offshore is historically riskier than banking onshore.

Offshore banking has been associated in the past with the underground economy and organized crime, through money laundering.[3] Following September 11, 2001, offshore banks and tax havens, along with clearing houses, have been accused of helping various organized crime gangs, terrorist groups, and other state or non-state actors. However, offshore banking is a legitimate financial exercise undertaken by many expatriate and international workers. Offshore jurisdictions are often remote, and therefore costly to visit, so physical access and access to information can be difficult. Yet in a world with global telecommunications this is rarely a problem for customers. Accounts can be set up online, by phone or by mail. Offshore private banking is usually more accessible to those on higher incomes, because of the costs of establishing and maintaining offshore accounts. However, simple savings accounts can be opened by anyone and maintained with scale fees equivalent to their onshore counterparts. The tax burden in developed countries thus falls disproportionately on middleincome groups. Historically, tax cuts have tended to result in a higher proportion of the tax take being paid by high-income groups, as previously sheltered income is brought back into the mainstream economy [5]. The Laffer curve demonstrates this tendency. Offshore bank accounts are sometimes touted as the solution to every legal, financial and asset protection strategy but this is often much more exaggerated than the reality.

Debit card:
A debit card (also known as a bank card or check card) is a plastic card that provides the cardholder electronic access to his or her bank account/s at a financial institution. Some cards have a stored value with which a payment is made, while most relay a message to the cardholder's bank to withdraw funds from a designated account in favor of the payee's designated bank account. The card can be used as an alternative payment method to cash when making purchases. In some cases, the cards are designed exclusively for use on the Internet, and so there is no physical card.[1][2] In many countries the use of debit cards has become so widespread that their volume of use has overtaken or entirely replaced the check and, in some instances, cash transactions. Like credit cards, debit cards are used widely for telephone and Internet purchases. However, unlike credit cards, the funds paid using a debit card are transferred immediately from the bearer's bank account, instead of having the bearer pay back the money at a later date. Debit cards usually also allow for instant withdrawal of cash, acting as the ATM card for withdrawing cash and as a check guarantee card. Merchants may also offer cashback facilities to customers, where a customer can withdraw cash along with their purchase.

Credit card:

A credit card is a small plastic card issued to users as a system of payment. It allows its holder to buy goods and services based on the holder's promise to pay for these goods and services.[1] The issuer of the card creates a revolving account and grants a line of credit to the consumer (or the user) from which the user can borrow money for payment to a merchant or as a cash advance to the user. A credit card is different from a charge card: a charge card requires the balance to be paid in full each month.[2] In contrast, credit cards allow the consumers a continuing balance of debt, subject to interest being charged. A credit card also differs from a cash card, which can be used like currency by the owner of the card. Most credit cards are issued by banks or credit unions, and are the shape and size specified by the ISO/IEC 7810 standard as ID-1. This is defined as 85.60 53.98 mm (3.370 2.125 in) (33/8 21/8 in) in size.

Smart card:
A smart card, chip card, or integrated circuit card (ICC), is any pocket-sized card with embedded integrated circuits. A smart card or microprocessor cards contain volatile memory and microprocessor components. The card is made of plastic, generally polyvinyl chloride, but sometimes acrylonitrile butadiene styrene or polycarbonate . Smart cards may also provide strong security authentication for single sign-on (SSO) within large organizations. A smart card may have the following generic characteristics:

Dimensions similar to those of a credit card. ID-1 of the ISO/IEC 7810 standard defines cards as nominally 85.60 by 53.98 millimetres (3.370 2.125 in). Another popular size is ID-000 which is nominally 25 by 15 millimetres (0.984 0.591 in) (commonly used in SIM cards). Both are 0.76 millimetres (0.030 in) thick. Contains a tamper-resistant security system (for example a secure cryptoprocessor and a secure file system) and provides security services (e.g., protects in-memory information). Managed by an administration system which securely interchanges information and configuration settings with the card, controlling card blacklisting and application-data updates. Communicates with external services via card-reading devices, such as ticket readers, ATMs, etc.

Benefits
Smart cards can provide identification, authentication, data storage and application processing.[1] The benefits of smart cards are directly related to the volume of information and applications that are programmed for use on a card. A single contact/contactless smart card can be programmed with multiple banking credentials, medical entitlement, drivers license/public transport entitlement, loyalty programs and club memberships to name just a few. Multi-factor and proximity authentication can and has been embedded into smart cards to increase the security of all services on the card. For example, a smart card can be programmed to only allow a contactless transaction if it is also within range of another device like a uniquely paired mobile phone. This can significantly increase the security of the smart card.

Governments gain a significant enhancement to the provision of publicly funded services through the increased security offered by smart cards. These savings are passed onto society through a reduction in the necessary funding or enhanced public services. Individuals gain increased security and convenience when using smart cards designed for interoperability between services. For example, consumers only need to replace one card if their wallet is lost or stolen. Additionally, the data storage available on a card could contain medical information that is critical in an emergency should the card holder allow access to this.

A smart card, combining credit card and debit card properties. The 3 by 5 mm security chip embedded in the card is shown enlarged in the inset. The contact pads on the card enables electronic access to the chip.

E-banking (Electronic Banking)

With advancement in information and communication technology, banking services are also made available through computer. Now, in most of the branches you see computers being used to record banking transactions. Information about the balance in your deposit account can be known through computers. In most banks now a days human or manual teller counter is being replaced by the Automated Teller Machine (ATM). Banking activity carried on through computers and other electronic means of communication is called electronic banking or e-banking. Let us now discuss about some of these modern trends in banking in India. Automated Teller Machine Banks have now installed their own Automated Teller Machine (ATM) throughout the country at convenient locations. By using this, customers can deposit or withdraw money from their own account any time. Debit Card Banks are now providing Debit Cards to their customers having saving or current account in the banks. The customers can use this card for purchasing goods and services at different places in lieu of cash. The amount paid through debit card is automatically debited (deducted) from the customers account. Credit Card Credit cards are issued by the bank to persons who may or may not have an account in the bank. Just like debit cards, credit cards are used to make payments for purchase, so that the individual

does not have to carry cash. Banks allow certain credit period to the credit cardholder to make payment of the credit amount. Interest is charged if a cardholder is not able to pay back the credit extended to him within a stipulated period. This interest rate is generally quite high. Net Banking With the extensive use of computer and Internet, banks have now started transactions over Internet. The customer having an account in the bank can log into the banks website and access his bank account. He can make payments for bills, give instructions for money transfers, fixed deposits and collection of bill, etc. Phone Banking In case of phone banking, a customer of the bank having an account can get information of his account, make banking transactions like, fixed deposits, money transfers, demand draft, collection and payment of bills, etc. by using telephone . As more and more people are now using mobile phones, phone banking is possible through mobile phones. In mobile phone a customer can receive and send messages (SMS) from and to the bank in addition to all the functions possible through phone banking.

Commercial Banks
Commercial Banks are banking institutions that accept deposits and grant short-term loans and advances to their customers. In addition to giving short-term loans, commercial banks also give medium-term and long-term loan to business enterprises. Now-a-days some of the commercial banks are also providing housing loan on a long-term basis to individuals. There are also many other functions of commercial banks, which are discussed later in this lesson. Types of Commercial banks: Commercial banks are of three types i.e., Public sector banks, Private sector banks and Foreign banks. (i) Public Sector Banks: These are banks where majority stake is held by the Government of India or Reserve Bank of India. Examples of public sector banks are: State Bank of India, Corporation Bank, Bank of Boroda and Dena Bank, etc. (ii) Private Sectors Banks: In case of private sector banks majority of share capital of the bank is held by private individuals. These banks are registered as companies with limited liability. For example: The Jammu and Kashmir Bank Ltd., Bank of Rajasthan Ltd., Development Credit Bank Ltd, Lord Krishna Bank Ltd., Bharat Overseas Bank Ltd., Global Trust Bank, Vysya Bank, etc. (iii) Foreign Banks: These banks are registered and have their headquarters in a foreign country but operate their branches in our country. Some of the foreign banks operating in our country are Hong Kong and Shanghai Banking Corporation (HSBC), Citibank, American Express Bank, Standard & Chartered Bank, Grindlays Bank, etc. The number of foreign banks operating in our country has increased since the financial sector reforms of 1991.

Functions of Commercial Banks

The functions of commercial banks are of two types. (A) Primary functions; and (B) Secondary functions. Let us discuss details about these functions.

(i) Primary functions

The primary functions of a commercial bank include: a) Accepting deposits; and b) Granting loans and advances. a) Accepting deposits The most important activity of a commercial bank is to mobilise deposits from the public. People who have surplus income and savings find it convenient to deposit the amounts with banks. Depending upon the nature of deposits, funds deposited with bank also earn interest. Thus,
Business Studies

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deposits with the bank grow along with the interest earned. If the rate of interest is higher, public are motivated to deposit more funds with the bank. There is also safety of funds deposited with the bank. b) Grant of loans and advances The second important function of a commercial bank is to grant loans and advances. Such loans and advances are given to members of the public and to the business community at a higher rate of interest than allowed by banks on various deposit accounts. The rate of interest charged on loans and advances varies according to the purpose and period of loan and also the mode of repayment. i) Loans A loan is granted for a specific time period. Generally commercial banks provide short-term loans. But term loans, i.e., loans for more than a year may also be granted. The borrower may be given the entire amount in lump sum or in instalments. Loans are generally granted against the security of certain assets. A loan is normally repaid in instalments. However, it may also be repaid in lump sum. ii) Advances An advance is a credit facility provided by the bank to its customers. It differs from loan in the sense that loans may be granted for longer period, but advances are normally granted for a short period of time. Further the purpose of granting advances is to meet the day-to-day requirements of business. The rate of interest charged on advances varies from bank to bank. Interest is charged only on the amount withdrawn and not on the sanctioned amount.

Types of Advances
Banks grant short-term financial assistance by way of cash credit, overdraft and bill discounting. Let us learn about these. a) Cash Credit Cash credit is an arrangement whereby the bank allows the borrower to draw amount upto a specified limit. The amount is credited to the account of the customer. The customer can withdraw this amount as and when he requires. Interest is charged on the amount actually withdrawn. Cash Credit is granted as per terms and conditions agreed with the customers. b) Overdraft Overdraft is also a credit facility granted by bank. A customer who has a current account with the bank is allowed to withdraw more than the amount of credit balance in his account. It is a temporary arrangement. Overdraft facility with a specified limit may be allowed either on the security of assets, or on personal security, or both. c) Discounting of Bills Banks provide short-term finance by discounting bills, that is, making payment of the amount

before the due date of the bills after deducting a certain rate of discount. The party gets the funds without waiting for the date of maturity of the bills. In case any bill is dishonoured on the due date, the bank can recover the amount from the customer.
Banking

11 ii) Secondary functions

In addition to the primary functions of accepting deposits and lending money, banks perform a number of other functions, which are called secondary functions. These are as followsa. Issuing letters of credit, travellers cheque, etc. b. Undertaking safe custody of valuables, important document and securities by providing safe deposit vaults or lockers. c. Providing customers with facilities of foreign exchange dealings. d. Transferring money from one account to another; and from one branch to another branch of the bank through cheque, pay order, demand draft. e. Standing guarantee on behalf of its customers, for making payment for purchase of goods, machinery, vehicles etc. f. Collecting and supplying business information. g. Providing reports on the credit worthiness of customers. i. Providing consumer finance for individuals by way of loans on easy terms for purchase of consumer durables like televisions, refrigerators, etc. j. Educational loans to students at reasonable rate of interest for higher studies, especially for professional courses.

Co-operative Banks
People who come together to jointly serve their common interest often form a co-operative society under the Co-operative Societies Act. When a co-operative society engages itself in banking business it is called a Co-operative Bank. The society has to obtain a licence from the Reserve Bank of India before starting banking business. Any co-operative bank as a society is to function under the overall supervision of the Registrar, Co-operative Societies of the State. As regards banking business, the society must follow the guidelines set and issued by the Reserve Bank of India.

Types of Co-operative Banks

There are three types of co-operative banks operating in our country. They are primary credit societies, central co-operative banks and state co-operative banks. These banks are organized at three levels, village or town level, district level and state level. (i) Primary Credit Societies: These are formed at the village or town level with borrower and non-borrower members residing in one locality. The operations of each society are restricted to a small area so that the members know each other and are able to watch over the activities of all members to prevent frauds. (ii) Central Co-operative Banks: These banks operate at the district level having some of the primary credit societies belonging to the same district as their members. These banks provide loans to their members (i.e., primary credit societies) and function as a link between the primary credit societies and state co-operative banks. (iii) State Co-operative Banks: These are the apex (highest level) co-operative banks in all the states of the country. They mobilise funds and help in its proper channelisation among

various sectors. The money reaches the individual borrowers from the state co-operative banks through the central co-operative banks and the primary credit societies.