Course: THEORY AND PRACTICES OF BANKING (1203)

Assignment on Introduction to Banking

Date of submission: September 25, 2011

Theory & Practices of Banking

Assignment On
Introduction to banking
Prepared for:

NILUTHPAUL SARKER
Lecturer Department of accounting and information system Jagannath University

Prepared by:

Mrinal kanti das

Roll: 114452
Sec: B BBA 6th batch

Department of accounting and information system

JAGANNATH UNIVERSITY
Date of submission: 25 September 2011

Faculty of Business Studies

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Theory & Practices of Banking

Evolution of banking business:

Human beings have always needed to trade things with each other because resources are distributed unevenly. One area is rich in wood, for instance, while another supports animal grazing or crop production. This is a critical principle of economics and banking, that resources are distributed unevenly on the earth. This has ever been a source of trade. When trade does not occur evenly or fairly, war is the inevitable result. Trade began with whole barter - trading one item for another. This is the simplest form of trading, and it continues around the world. However, it is cumbersome and often won't work. It requires two people who each want what the other has. If one party wants something else, whole barter breaks down. So early on, people invented or discovered mediums of exchange or currency of some kind. Beads, sea shells, salt, precious metals, gems, gold coins, tobacco leaves, hemp and many other items have been used as currency. The main requirements for money or currency are a) That it be readily identified and valued, b) That it have some more or less stable value and c) That the parties agree to use it as currency. In 5000 B.C the currency was invented and traditional banking activities were started in Greece, Rome & Egypt. According to Smith money is the mother of banks and banks are the reformer of the money Somewhat inconvenient to carry around, people began to store money safely to the goldsmiths and the goldsmiths gave loan to other people from their kept money. This was the beginning of modern banking. According to prof. sayers money changing is responsible for early development of banking

Shindhu civilization: (B.C 5000- B.C 2000)

The shindu civilization's economy appears to have depended significantly on trade, which was facilitated by major advances in transport technology. Shindu is the first civilization to use wheeled transport. they developed the trading system dramatically and they introduces depositing, lending and exchanging system.

Babylonian civilization:
Banking activities were sufficiently important in Babylonia in 2000 b.c. that written standards of practice were considered necessary. These standards were part of the Code of Hammurabi, the earliest known formal laws. Obviously, these primitive banking transactions were very different in many ways to their modern-day counterparts. Deposits were not of money but of cattle, grain or other crops and eventually precious metals. Nevertheless, some of the basic concepts underlying todays banking system were present in these ancient arrangements, however. A wide
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range of deposits was accepted, loans were made, and borrowers paid interest to lenders. According to dimitris N. chorafast one of the earliest evidence of banking operations dates from the code of Hammurabi, the founder of the Babylonian empire (1728-1686 B.C)

Vedic civilization (B.C 2000-1000)

There were many trace out of banking business like a wide range of deposits was accepted, loans were made, and borrowers paid interest to lenders is being found on ved , the holy book of vedic civilization. According to ved there were different types of information of loan and interest that was introduced on that age.

Roman civilization (1000B.c)

In Ancient Rome moneylenders would set up their stalls in the middle of enclosed courtyards called macella on a long bench called a bancu, from which the wordsbanco and bank are derived. As a moneychanger, the merchant at the bancu did not so much invest money as merely convert the foreign currency into the only legal tender in Rome that of the Imperial Mint

Civilization of china (600 B.C)

In ancient China starting in the Qin Dynasty the Chinese currency developed with the introduction of standardized coins which allowed the much easier trade across China and led to the development of letters of credit. These letters were issued by merchants that acted in ways that today we would understand as banks. After the establishment of Shansi bank in 600 b.c, it gave new dimension in banking evolution.

Civilization of Greece (400 bc)

Ancient Greece holds further evidence of banking. Greek temples, as well as private and civic entities, conducted financial transactions such as loans, deposits, currency exchange, and validation of coinage. There is evidence too of credit, whereby in return for a payment from a client, a moneylender in one Greek port would write a credit note for the client who could "cash" the note in another city, saving the client the danger of carting coinage with him on his journey. Pythius, who operated as a merchant banker throughout Asia Minor at the beginning of the 5th century BC, is the first individual banker of whom we have records. Many of the early bankers in Greek city-states were metics or foreign residents. Around 371 BC, Pasion, a slave, became the wealthiest and most famous Greek banker, gaining his freedom and Athenian citizenship in the process.
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Egyptian civilization:
Similar banking type arrangements could also be found in ancient Egypt. These arrangements stemmed from the requirement that grain harvests be stored in centralized state warehouses. Depositors could use written orders for the withdrawal of a certain quantity of grain as a means of payment. This system worked so well that it continued to exist even after private banks dealing in coinage and precious metals were established The duration of banking business between 5000 B.C to 400 B.C is being called ancient age of banking business.

Definition of Bank:
Bank is a financial institution that collects societys surplus, cash and gives a part of them as loan to the investors for earning profit. So bank is an intermediary institution that makes relationship between the owner of surplus saving and the investor of deficit capital. In this process banks earn profit by receiving interest from the borrower who want to take short time loan and making relatively lower interest payment to the depositor for providing their fund for use by the bank. According to American institution of banker the bank provides services, activities and acts as intermediary between creditor and lender According to W.Hock the bank is an institution which creates money with money According to J.C. wood bank is the trader of money and loan In a broader sense, it is said that bank is the heart of complex financial structure In fine, we can say that bank is a institute that is registered by the law and make it perform the following activities:1) Receives current deposit and give the withdrawal facilities to client through the cheek. 2) Receive term deposit and pay interest on it. 3) Discounting notes, approving loan and invest in government and other credit instrument. 4) Collect cheek, graph and note 5) Issue graph and cashier cheek. 6) Act as a trusty in accordance with government permission.
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Definition of banking:
Banking is one of the key drivers of any economy. Banking provides a safe place to save excess cash, known as deposits. It also supplies liquidity to the economy by loaning this money out to help businesses grow and to allow consumers to purchase homes, cars and consumer products. Banks primarily make money by charging higher interest rates on their loans than they pay for deposits. In general terms, the business activity of accepting and safeguarding money owned by other individuals and entities, and then lending out this money in order to earn a profit. According to oxford English dictionary business is the business of a banker, the keeping or management of a bank According to Professor R.S Davar acceptance of deposit is sinequanon to constitute banking The Bangladesh bank is the nation's central bank. As such, it creates the supply of money by lending it to the banking system, requiring the level of reserves banks must keep on hand, and by regulating the prime interest rate banks charge. There are several types of banks. Commercial banks are the most common, and include global banks such as city bank and HSBC bank. Community banks are smaller and focus on local service. Online banks operate over the Internet. Savings and loans target mortgages. Credit unions are usually restricted to employees of companies or schools. Shariah banking was developed to conform to the Islamic prohibition against interest rates.

Definition of banker:
Private persons or partnerships could carry on the business of a bank; mostly receiving monies on deposit, paying interest on those deposits and extending loans of those monies to third-parties at a higher rate of interest is called banker. In 1899, the United States Supreme Court (Austen) used these words: "A banker ... is a trader who buys money, or money and debts, by creating other debts, which he does with his credit - exchanging for a debt payable in the future one payable on demand. "A banker (is) a dealer in capital, or, more properly, a dealer in money. He is an

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intermediate party between the borrower and the lender. He borrows of one party and lends to another." In United Dominions (1966), Justice Diplock wrote: "It is essential to the business of banking that a banker should accept money from his customers on a running account into which sums of money are from time to time paid by the customer and from time to time withdrawn by him by cheque.... "... The banker must also undertake to pay cheques drawn on himself (the banker) by his customers in favor of third parties up to the amount standing to their credit in their current accounts and to collect cheques for his customers and credit the proceeds to their current accounts." And, in his 1816 Law Dictionary, Williams noted that: "Goldsmiths were the first who got the name of bankers in the Reign of King Charles the Second."

Formation of Bank:

Requirements for formation of commercial banks are established by the relevant regulator. Requirements for a state-chartered commercial bank are set by the state's banking department. If a national charter is selected, the requirements are determined by the Office of the Comptroller of the Currency. Organizers must also comply with Federal Reserve and FDIC regulations. Name and Representative Organizers must select an acceptable name for the proposed institution and must select a representative to be their liaison with the regulators. The representative will be the person who will meet with the regulators, discuss the submissions and respond to questions. Organizers will also need a law firm experienced in bank formations. Management Team Organizers must provide the names of all proposed directors, senior executive officers and major shareholders. Each person must submit a comprehensive biographical and financial disclosure report and be fingerprinted. All of the proposed directors and others will be subjected to rigorous investigation of their personal, business and financial backgrounds. Regulators will also review the qualifications and experience of the proposed directors and officers, their connection to the community and their fitness to manage a commercial bank and to implement the bank's business plan. The management team must have experience with commercial credit analysis and business
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loan approval, bank and personnel administration, management of bank operations and control and audit functions. The position of bank president must be filled by a person with extensive commercial bank management experience. The regulators will review any compensation agreements. Bank Site and Hard Assets

The bank must have a proposed location. If the premises are to be purchased, organizers must identify the seller, purchase price, estimated cost and description of construction, repairs and alterations, and annual depreciation. If the bank premises are to be leased, organizers must provide the name of the owner, terms of the lease and cost and description of necessary improvements. Organizers must disclose whether any incorporator, director or major shareholder has any interest in the proposed site. Formation Expenses and Operating Capital Organizers must demonstrate that they have the required funds to complete the formation process and a plan to raises the tens of millions of dollars in operating capital needed to open and operate a bank. All planned formation expenses must be disclosed, including a description of each cost, the name of the recipient and type of professional services or goods. Organizers must state the source of the formation funds. The regulator will determine how much capital must be raised in order to open the bank. This will depend on the type and the location of the proposed institution. For example, the New York State Banking Department generally requires that new banks in the New York metropolitan area raise minimum capital of $35 million, not including pre-opening expenses. New banks in upstate New York typically require less initial capital. The amount required for a national bank will depend on the location, but is estimated at a minimum capital requirement of $20 million. If organizers intend to raise capital by the sale of bank stock, they must specify the number of shares, their par value and subscription price and the amount of stock to be purchased by the incorporators and directors and any known large investors. The cost of the stock offering must be included in the formation expenses. Business Plan

Organizers must have a viable business plan for the new bank. The plan must include the expected annual operating and maintenance costs (including site costs, telecommunications, hardware, software and personnel). The business plan must demonstrate how the bank will function during the first few years of operation in relation to the initial capital, when and how the bank will make a profit and how the bank plans to finance future growth. Community Market Study Organizers must define the bank's intended market area, including a map indicating the location of the proposed bank site and other competing banking institutions within the same geographic area. The organizers must describe the bank's target customers, how the proposed new institution will deal with competitive factors, the commercial products and services to be provided and how a new bank will affect other area financial institutions. The bank must also have a Community Reinvestment Act (CRA) Plan
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describing the credit needs of the proposed market area, including low- and moderateincome customers and how the bank intends to comply with CRA regulations.

Objectives of bank:
1.Accepting Deposits: The most important objectives of bank are to accept deposits from the public. Various sections of society, according to their needs and economic condition, deposit their savings with the banks. For example, fixed and low income group people deposit their savings in small amounts from the points of view of security, income and saving promotion. On the other hand, traders and businessmen deposit their savings in the banks for the convenience of payment. 2. Giving Loans: The second important objectives of bank are to advance loans to its customers. Banks charge interest from the borrowers and this is the main source of their income. Banks advance loans not only on the basis of the deposits of the public rather they also advance loans on the basis of depositing the money in the accounts of borrowers. In other words, they create loans out of deposits and deposits out of loans. This is called as credit creation by commercial banks. Modern banks give mostly secured loans for productive purposes. In other words, at the time of advancing loans, they demand proper security or collateral. Generally, the value of security or collateral is equal to the amount of loan. This is done mainly with a view to recover the loan money by selling the security in the event of non-refund of the loan.

3. Currency issuance: In similarity with commercial banks, central banks hold assets (foreign exchange, gold, and other financial assets) and incur liabilities (currency outstanding). Central banks create money by issuing zero interest currency notes and selling them to the public in exchange for interest-bearing assets such as government bonds. When a central bank wishes to purchase more bonds than their respective national governments make available, they purchase assets denominated in foreign currencies

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4. Promoting price stability: The Bank promotes price stability in the country through participation by the Governor in the Governing Council of the Bangladesh bank. For this purpose the Bank conducts economic analysis and research. The Bank is also responsible for the implementation in Bangladesh of the Governing Council's monetary policy decisions.

5. Contributing to the stability of the financial system: The Bank contributes to the stability of the financial system through ongoing macro surveillance of the infrastructure, financial institutions and markets and by monitoring and assessing the implications for financial stability of economic and financial developments, both domestically and in the global area. As part of its early warning system, the Bank analyses data to identify sources of risk and tests the resilience of the financial sector to withstand eventual shocks. This approach is supported by the development of a sound framework for the management of crisis situations and of contingency procedures. Ultimately, in order to safeguard financial stability, the Bank acts as lender of last resort.

6. Promoting, regulating and overseeing sound and efficient payment and securities settlement systems: The Bank promotes, oversees and regulates the operation of, and the participation in, domestic payment systems as well as any form of cash or security transactions, whether domestic or cross-border. This role relates both to retail and wholesale payment systems, including the instruments used, and involve the establishment of policy and the monitoring of payment and securities settlement developments. In exercising its oversight role, the Bank promotes a competitive, safe and efficient payment services environment.

7.Supporting the development of financial markets: The Bank promotes and supports the further development of the domestic financial market with the aim of facilitating its smooth and effective integration into the PanEuropean market.

8.Providing and promoting efficient currency services: The Bank issues bank notes and coins. The Bank is responsible for providing notes and coins to meet demand from the public. The Bank also ensures the authenticity and quality of currency in circulation through the withdrawal of counterfeit and damaged notes and coins.
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9.Optimizing the returns on financial assets through prudent investment practices: The Bank holds and manages a portfolio of foreign and domestic financial assets. It seeks to maximize the return on financial assets subject to prudent investment practices. 10.Collecting, compiling, disseminating and publishing statistics: The Bank compiles economic and financial statistics in accordance with international standards. Statistics are made available through the Bank's regular publications, its website, the publications of the Bangladesh bank and other international organizations. 11.Advising the Government generally on financial and economic matters: The Bank acts as an advisor to the Government on financial and economic matters. In offering independent advice, the Bank contributes to sound policy-making. The Bank is able to do this on the strength of its expertise, its reputation and its independent status. The Bank also acts as banker and agent to the Government.

Functions of bank:
General function: 1. Accepting of deposits : The following are the types of deposits: a) Current deposits account: They are, generally opened by trading and industrial concerns, public authorities, etc. Current accounts are active or running accounts which are continuously in operation. Customers can deposit any amount of money and any number of timesand their no restriction on number of withdrawals. Current deposits are repayable on demand. It is for this reason, they are also called demand deposits or demand liabilities. So, banks are required to keep the major portion of the current deposits in liquid form. Generally no interest is allowed on current deposits. b) Fixed deposit account: They are opened by small investors who do not wan invest their money in risky industrial securities, but wish to deposit their money in banks and earn good and steady income. No introduction is necessary for opening the fixed deposit accounts, as they are not operated by
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cheques. Fixed amounts are deposited by customers for fixed periods at fixed rate of interest. The fixed deposits can be withdrawn, not on demand, but only after the expiry of fixed periods. It is for this reason known as time deposits. c) Savings deposit account: They are opened by middle and low income groups who wish to save a part of their current incomes for their future needs and earn fair interest on their deposits. Customers can deposit any amount of money and any number of times. There are restrictions on the number as well as the amount of withdrawals from these accounts. d) Recurring deposit: It is meant for people who have regular monthly incomes. They are intended to encourage the habit of saving among the depositors on a regular basis. The depositor deposits a fixed sum of money every month for an agreed period, and at the end of the specified period, he gets back the amount deposited together with the interest accrued thereon. 2. Forms of advances a) Loans: The banker advances a lump sum for a certain period at an agreed rate of interest. The entire amount is credited to loan a/c, interest is charged on entire amount whether the borrower withdraws in full or part. The loan may be repaid in installments or at the expiry of a certain period. The loan may be made with or without security. Loan may be a demand loan or a terms loan. Demand loan is payable on demand, it is for meeting the working capital needs of the borrower. Term loans may be medium term or long term loan. Medium term loans are granted for a period of one year to 5 years for the purchase of vehicles, tools and equipments. Long term loans are granted for a period of more than 5 years for capital expenditure such as purchase of land, building, new machinery etc.

b) Cash credit: This a permanent arrangement by which the customer is allowed to borrow money upto a certain limit, here the borrower withdraws the money as and which he requires and interest is charged only on the amount actually withdrawn. Cash credit arrangements are usually against pledge or hypothecation of goods. Cash credits are the most favourite mode of borrowing by large commercial and industrial concerns. c) Overdrafts: Overdraft is an arrangement between a banker and his customer by which the latter is allowed to withdraw over and above his credit balance in the current account upto on agreed limit. This is only a temporary
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accommodation/arrangements usually granted against securities. Interest is charged on the amount overdrawn. d) Bills discounted and purchased: While the traders opt for credit transaction the debtors accepts the bill drawn upon him to pay certain sum money on certain specified date by the credit-BOE. The banker discounts the BOE and credits the customer a/c, here the banker receives the interest in advance. Sometimes banks purchase the bill instead discounting them. But in almost all cases the bank holds the bill only as a security for the advance. 3. Creation of credit: Credit creation is an important function of commercial banks. When a commercial bank advances a loan to its customers, liquid cash will not be lent. Instead it opens an account in the borrower's name and credits his account with the amount of loan. Such a deposit is indeed credit creation .and this deposit is called secondary or derivative deposit. Thus credit creation helps to increase the money supply so as to promote economic development in the country. 4. Use of cheque system: Commercial banks perform the unique function of issuing and collecting cheques. Deposits can be withdrawn with the help of a cheque as it is a negotiable instrument. It can be transferred easily from one person to another. It becomes the most developed credit instrument. In modem business world the use of cheques to settle debts is found to be more convenient form than the use of liquid cash. 5. Remittance of funds: Banks help their customers in transferring funds from one place to another by issuing bank drafts, mail transfers, telegraphic transfers and electronics transfers on nominal commission charges.

6. .Issuing bank note: : The currency of our country consists of one-taka and two taka notes and coins (including subsidiary coins) issued by the government of bangladesh and bank note issued by Bangladesh bank. Bangladesh bank also bears the responsibility of exchanging notes & coins into those of other denominations as required by the public. The assets of the Issue Department against which bank notes are issued consist of the following: Gold Coins & Bullion Foreign Securities Bank note Securities & The bill of exchange and promissory notes payable in Bangladesh, which are eligible for purchase by the Bank.

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7. Controller of Credit: Probably the most important of all the functions performed by a central bank is that of controlling the credit operations of commercial banks. In modern times bank credit his become the most important source of money in the country, relegating coins and currency noted to a minor position. Moreover, it is possible, as we have pointed out in a previous chapter, for commercial banks to expand credit and thus intensify inflationary pressure or contract credit & thus contribute to a deflationary situation. It is, thus, of great importance that there should he some authority which will control the credit creation by commercial banks. As controller of credit the central bank attempts to influence and control the volume of bank credit & also to stabilize business conditions in the country

Economic functions
The economic functions of banks include: 1. Issue of money: in the form of banknotes and current accounts subject to check or payment at the customer's order. These claims on banks can act as money because they are negotiable or repayable on demand, and hence valued at par. They are effectively transferable by mere delivery, in the case of banknotes, or by drawing a checkthat the payee may bank or cash. 2. Netting and settlement of payments banks act as both collection and paying agents for customers, participating in interbank clearing and settlement systems to collect, present, be presented with, and pay payment instruments. This enables banks to economies on reserves held for settlement of payments, since inward and outward payments offset each other. It also enables the offsetting of payment flows between geographical areas, reducing the cost of settlement between them. 3. Credit intermediation banks borrow and lend back-to-back on their own account as middle men. 4. Credit quality improvement banks lend money to ordinary commercial and personal borrowers (ordinary credit quality), but are high quality borrowers. The improvement comes from diversification of the bank's assets and capital which provides a buffer to absorb losses without defaulting on its obligations. However,
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banknotes and deposits are generally unsecured; if the bank gets into difficulty and pledges assets as security, to raise the funding it needs to continue to operate, this puts the note holders and depositors in an economically subordinated position. 5. Maturity transformation banks borrow more on demand debt and short term debt, but provide more long term loans. In other words, they borrow short and lend long. With a stronger credit quality than most other borrowers, banks can do this by aggregating issues (e.g. accepting deposits and issuing banknotes) and redemptions (e.g. withdrawals and redemption of banknotes), maintaining reserves of cash, investing in marketable securities that can be readily converted to cash if needed, and raising replacement funding as needed from various sources (e.g. wholesale cash markets and securities markets). 6. Money creation whenever a bank gives out a loan in a fractional-reserve banking system, a new sum of virtual money is created.

Banking system:

Banking system divided in 4 category .these are given below : 1.American banking system: U.S. banking system that consists of 12 Federal Reserve banks, with each one serving member banks in its own district. This system, supervised by the Federal Reserve Board, has broad regulatory powers over the money supply and the credit structure.As a result of the Federal Reserve Act of 1913, all national banks are required to join the system; state banks may join if they meet membership qualifications. The Federal Reserve is responsible for monetary policy. The original act set fixed reserve requirements for the U.S. fractional reserve banking system. It allowed each district bank to determine its discount rate, the rate it charged on loans to member banks. The modern Federal Reserve resulted from the Federal Reserve Act of 1935, which allowed the board to determine reserve requirements within defined limits. It became responsible for approving the discount rates of the district banks. Most importantly, the act created the Federal Reserve Open Market Committee, which is responsible for conducting operations in financial markets that increase or decrease the amount of reserves in the system. If the Federal Reserve wants to ease monetary policy, it will use open market operations and increase the amount of reserves through the purchase of financial assets. Conversely, it can tighten monetary policy through the
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sale of financial assets. The Fed, as it is commonly called, regulates the U.S. monetary and financial system. The Federal Reserve System is composed of a central governmental agency in Washington, D.C. (the Board of Governors) and twelve regional Federal Reserve Banks in major cities throughout the United. The Federal Reserve's duties divided into four general areas: 1. conducting monetary policy 2. Regulating banking institutions and protecting the credit rights of consumers 3. Maintaining the stability of the financial system 4. Providing financial services to the U.S. government

2.German banking system: The German banking system relies on three pillars: the public sector, the cooperative sector, and the purely private sector. This construct, although first signs of a future change have emerged, creates a quite rigid system. As a result, the German banking market is quite fragmented and difficult to understand for outsiders. For costumers this has not let to high prices or bad service, rather the opposite is the case. Most private costumers hardly have an understanding of how the banks differ in their form of organization and perceive the service of the different sectors as quite comparable. As the share of the purely private sector is quite low, German commercial banks such as Deutsche Bank and Commerzbank have not been able to compete with the strongest and biggest global institutions on the same level.

3. japaneese banking system: Japan is the most important financial center in Asia. The overwhelming success has Often been described to the way Japan's regulators have structured and supervised their financial markets and institutions over the years. In the 1960's and 1970's, the system was organized as a means to stimulate industrial development. Through a collaboration of particularly the Ministry of Finance (MoF) and the Ministry of Trade and Industry (MITI), funds were channeled to growth sectors, while credit lines towards declining industries were cut off. From the second half of the 1970's, the financial system increasingly became an important growth sector itself. In general, one may distinguish three objectives of financial regulation: maintaining stability and soundness
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of the financial system, providing an adequate level of investor protection, and promoting market efficiency. In postwar Japan, the regulatory authorities have strongly focused on the stability objective, while giving lower priority to investor protection and efficiency. No major crisis occurred and not even one bank went bankrupt. Instead of allowing weak financial institutions to go under, MoF often helped small banks with loans and arranged bank mergers and take-overs where possible. Competition between banks was virtually non-existent and the efficiency of the industry remained at a very low level. This policy of Japan's regulatory authorities is often described as the 'convoy system', according to which the speed of the total convoy is determined by the speed of the slowest ship. Confidence in the banking industry was high. However, the inherent moral hazard problem made banks reckless in the second half of the 1980's, which led to a situation in which the whole banking industry was weak and barely able to cope with increased international competition. As a result, the government started to promote take-over more actively in the 1990's, and quietly discussed the possibility of bankruptcies. These last twenty years of Japan's financial history have been described and analyzed extensively. Notoriously lacking was a thorough analysis of the period in which the present financial system originated. Tamaki's book fills this gap. It is the first full account in English of the banking industry in Japan for the century following the opening of the country to the outside world in 1859. These hundred years appear to be at least as exciting as the last twenty.

4.indian banking system: Without a sound and effective banking system in India it cannot have a healthy economy. The banking system of India should not only be hassle free but it should be able to meet new challenges posed by the technology and any other external and internal factors. For the past three decades India's banking system has several outstanding achievements to its credit. The most striking is its extensive reach. It is no longer confined to only metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of the country. This is one of the main reasons of India's growth process. The government's regular policy for Indian bank since 1969 has paid rich dividends with the nationalization of 14 major private banks of India. Not long ago, an account holder had to wait for hours at the bank counters for getting a draft or for withdrawing his own money. Today, he has a choice. Gone are days when
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the most efficient bank transferred money from one branch to other in two days. Now it is simple as instant messaging or dials a pizza. Money has become the order of the day. The first bank in India, though conservative, was established in 1786. From 1786 till today, the journey of Indian Banking System can be segregated into three distinct phases. They are as mentioned below: Early phase from 1786 to 1969 of Indian Banks Nationalization of Indian Banks and up to 1991 prior to Indian banking sector Reforms. New phase of Indian Banking System with the advent of Indian Financial & Banking Sector Reforms after 1991.

Types of Banks:
Banks can be classified into various types on the bases of their functions, ownership, domicile, etc. The following are the various types of Banks: 1. Commercial Banks: The Banks which perform all kinds of banking business and generally finance trade and commerce are called commercial banks. Since, their deposits are for a short period, these banks normally advance short term loans to businessmen and traders and avoid medium and long term and long term lending. However, recently. Commercial banks have also extended their areas of operation to medium term and long term finance. 2. Industrial Banks: Industrial banks also known as investment banks mainly meet the medium term and long term financial needs of the industries. The main functions of Industrial banks are: a. They accept long term deposits b. They grant long term loans to industrialists to enable them to purchase land, construct factory buildings, purchase heavy buildings, etc. c. They help sell or underwrite the debentures and shares of industrial firms. d. They can also provide information about the general economic position of the economy: Example: Industrial Development bank of India (IDBI); Industrial Finance Corporation of India (IFCI); State Finance Corporations (SFC) 3. Agricultural Banks: Agricultural credit needs are different from those of Industry and Trade. The Agriculturists require: a. Short term credit to buy seeds, fertilizers and other inputs. b. Long Term credit to purchase land, to make permanent improvements on land, To purchase agricultural machinery and equipment, etc
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In India Agricultural Finance is generally provided by co-operative institutions. Agricultural co-operatives provide short-term loans and Land Development banks provide Long term credit to the agriculturists 4. Exchange Banks: Exchange banks Deal in foreign exchange and specialize in financing foreign Trade. They facilitate international payments through the sale and purchase of bills of exchange and thus play an important role in promoting foreign trade. 5. Savings Bank: The main Purpose of saving banks is to promote saving habits among the general public and mobilize their small savings. In India, postal saving banks do this job. They open accounts and issue postal cash certificates. 6. Central Bank: Central bank is the apex institution which controls, regulates and supervises the monetary and credit system of the country. The Important functions of the central bank are: a. It has the monopoly of note issue. b. It acts as a banker, agent and financial advisor to the state. c. It is the custodian of member banks reserves. d. It is the custodian of national reserves of international currency. e. It serves as the lender of the last resort. f. It serves as the bank of central clearance, settlement and transfer g. It acts as the controller of credit. 7. World Bank: World Bank refers to an institution which provides financial assistance to the member countries of the world. After the world wide depression and World War II, two institutions were founded in 1944, a) International Monetary Fund (IMF), b) International Bank of Reconstruction and development (IBRD) or popularly known as the World Bank. While the IMF was established to provide short-term loans to overcome the balance payments difficulties, the World Bank aimed at providing long term loans for the purpose of (a) reconstructing the war-damaged economies and (b) developing the less developed economies. 8. Classification on the Basis of Ownership: On the basis of ownership, banks can be classified into three categories: a. Public Sector Banks: These are owned and controlled by the government: In India, the nationalized banks and the regional rural banks come under these categories. b. Private Sector Banks: These banks are owned by the private individuals or corporations and not by the government or co- operative societies. c. Co-operative Banks: Cooperative banks are operated on the co-operative lines. In India, co-operative credit institutions are organized under the co-operative societies law and play an important role in meeting the financial needs in the rural areas. 9. Classification on the basis of Domicile: On the basis of domicile, the banks are divided in to two categories: a. Domestic banks: These are registered and incorporated within the country b. Foreign banks: These are foreign in origin and have their head offices in the country of origin.

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10. Scheduled and Non-scheduled Banks: A Scheduled Bank is that which has been included in the Second Schedule of the Reserve Bank of India Act, 1934 and fulfills the three conditions: a. It has paid-up capital and reserves of at least of Rs 5 lakhs. b. It ensures the reserve bank that its operations are not detrimental to the interest of the depositor. c. It is a corporation or a cooperative society and not a partnership for single owner firm. The banks which are not included in the Second schedule of the Reserve Bank of India Act are non-scheduled banks.

Automated teller machine (ATM):

Automated teller machine (ATM) is a computerized machine that permits bank customers to gain access to their accounts with a magnetically encoded plastic card and a code number. It enables the customers to perform several banking operations without the help of a teller, such as to withdraw cash, make deposits, pay bills, obtain bank statements, effect cash transfers. It is also called as automated Banking machine, automatic till machine, or remote service unit. There are two primary types of automated teller machines, or ATMs. The basic units allow the customer to only withdraw cash and receive a report of the account's balance. The more complex machines will accept deposits, facilitate credit card payments and report account information. To access the advanced features of the complex units, you will usually need to be a member of the bank that operates the machine.

In brief an unattended electronic machine in a public place, connected to a data system and related equipment and activated by a bank customer to obtain cash withdrawals and other banking services.

Debit card:
An electronic card issued by a bank which allows bank clients access to their account to withdraw cash or pay for goods and services. In broad sense an embossed plastic card issued by a bank or building society to enable its customers to pay for goods or services by inserting it into a computercontrolled device at the place of sale, which is connected through the telephone network to the bank or building society. It may also function as a cash card, a cheque card, or both. In a debit card transaction, the amount of a purchase is withdrawn from

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the available balance in the cardholder's account. If the available funds are insufficient, the transaction is not completed. This removes the need for bank clients to go to the bank to remove cash from their account as they can now just go to an ATM or pay electronically at merchant locations. This type of card, as a form of payment, also removes the need for checks as the debit card immediately transfers money from the client's account to the business account.

The major benefits to this type of card are convenience and security. Along with the convenience of accessing account funds at anytime it also removes the hassles associated with having to write checks as payment like showing ID and associated fees. Debit cards are also considered to be a safer form of payment as a code is required to access the account funds, while checks can be easily stolen. A short strip of magnetic tape attached to a credit card or debit card; it contains data that will tell a reading device who you are and what your account number is, etc. Provide electronic access to customers bank account. Allow for instant withdrawal of cash Debit cards act like checks when paying for goods and services or withdrawing cash at automated teller machines

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. 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. Credit Cards introduce financial flexibility into modern consumers' lives. For those who always pay off their balances, credit cards eliminate the need to carry cash or obtain check-cashing approval. For those who carry a balance, credit cards allow acquisition of goods and services that cannot be paid for in full when purchased. According to investopia A card issued by a financial company giving the holder an option to borrow funds, usually at point of sale. Credit cards charge interest and are primarily used for short-term financing. Interest usually begins one month after a
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purchase is made and borrowing limits are pre-set according to the individual's credit rating In broad sense credit card is a standard-size plastic token, with a magnetic stripe that holds a machine readable code. Credit cards are a convenient substitute for cash or check, and an essential component of electronic commerce and internet commerce. Credit card holders (who may pay annual service charges)draw on a credit limit approved by the card-issuer such as a bank, store, or service provider (an airline, for example).Cardholders normally must pay for credit card purchases within 30 days of purchase to avoid interest and/or penalties.

Compared to debit cards and cheques, a credit card allows small short-term loans. Almost every store allows for payment of goods and services through credit cards. Credit cards eliminate the need to carry cash or obtain check-cashing approval. Credit cards have higher interest rates (around 19% per year) than most consumer loans or lines of credit.

Master card:
MasterCard is a worldwide credit card corporation that works with financial institutions to issue credit cards. The credit cards distributed by the company are done so under the MasterCard brand, which is one of the three major credit cards accepted at vendors across the world. The credit provided to card holders is controlled by the financial institution that issues the card and not MasterCard. MasterCard converted from a privately held company to a public company on May 25, 2006. MasterCard Worldwide is an American multinational corporation with its headquarters in New York. Throughout the world, its principal business is to process payments between the banks of merchants and the card issuing banks or credit unions of the purchasers who use the "MasterCard" brand debit and credit cards to make purchases.

MasterCard Incorporated is a membership organization owned by the 25,000 financial institutions that issue its card. MasterCard is also the company's brand of credit cards.
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It was originally created by United California Bank, Wells Fargo, Crocker Bank, and the Bank of California as a competitor to the BankAmerica card issued by Bank of America. BankAmerica card is now the VISA credit card, issued by Visa International. The name Master Charge was licensed by these California banks from the First National Bank of Louisville, Kentucky in 1967. With the help of New York's Marine Midland Bank (now HSBC Bank USA), these banks joined with the Interbank Card Association (ICA) to create "Master Charge: The Interbank Card". In 1979, "Master Charge: The Interbank Card" was renamed "MasterCard".

Visa card:
Visa card is a type of CREDIT CARD (=plastic card used to obtain goods and services, which the buyer pays for later) which can be used all over the world Visa is a global payments technology company headquartered in California. It facilitates electronic funds transfers throughout the world, most commonly through Visabranded credit card and debit cards. Visa does not issue cards, extend credit or set rates and fees for consumers; rather, Visa provides financial institutions with Visabranded payment products that they then use to offer credit, debit, prepaid and cashaccess programs to their customers. In 2008, according to The Nilson Report, Visa held a 38.3% market share of the credit card marketplace and 60.7% of the debit card marketplace in the United States. In 2009, Visas global network (known as VisaNet) processed 62 billion transactions with a total volume of $4.4 trillion. A credit card issued with the Trade Name "Visa" on it; as, he charged the dinner to his Visa. Visa is a competitor of Master Card, Discover, MBNA, and American Express, and other credit card companies.

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