Chapter One - Introduction

Meaning – A bank may mean different things to different people :-

• A storehouse of money
• An institution of funding or finance
• A depository for their Savings

Origin :-
The origin of the word ‘ Bank’ can be traced back to the –
• German word – Banck – which means – heap or mound or joint stock
fund
• French word – bancus or banque – which means a bench (benches
resembled banking counters).
Evolution

Our Banking system is based upon the British Banking System.

Three Presidency Banks dominated the banking space i.e Bank of Bengal,
Bank of Bombay and Bank of Madras. These were set-up by special
charter of the British Government.

These 3 banks were later amalgamated to form Bank called the Imperial
Bank of India (IBI) under the Imperial Bank of India Act, 1920.

It managed :

• Commercial Banking
• Public debt office of the Central & State Govt.

At that time, Govt. used to issue currency notes & coins.

 Bank of Bombay Bank of Madras
Bank of Bengal
The Banking Regulation 1949 defines :

• Banking Company (Sec. 5(c)) as – a company which transacts the

business of banking in India

• Banking – Sec 5(b) – as accepting for the purpose of lending or

investment of deposits of money from the public, repayable on
demand or otherwise and withdrawable by cheque, draft, order or
otherwise.

• Sec. 49 A of the Act – prohibits any institution other than a banking

co. to accept deposit money from public withdrawable by cheque.
Features of Banking :

• Dealing in money – Bank accepts deposits from public and

advance the same as loans to needy people.

• Deposits must be withdrawable – Deposits other than Fixed

Deposits are withdrawable by cheques, drafts or otherwise.

• Dealing with credit – Banks create credit i.e. creation of

additional money for lending.

• Commercial in nature – All Banking functions are carried on with

the aim of making profit.

• Nature of agent – Various agency functions are performed by the

Bank like payment of electricity bills, Insurance, telephone bills,
mobile bills etc
Year Events
1935 Reserve Bank of India was set-up. Also known as Central Bank.
RBI regulated banking by issue of directives, inspection, mergers,
amalgamations etc in terms of the provsions of the Banking Cos. Act
1949, which is now called as Banking Regulation Act 1949.

1955 The ‘SBI Act’ was passed and the Imperial Bank of India was
nationalized and SBI emerged – with the objective of extension of
Banking facilities on a large scale- in urban, semi-urban as well as
rural areas

1959 The ‘SBI (Subsidiary Banks) Act’ was passed by which the public
sector was extended with foll. 8 Banks :
Later, State Bank of Jaipur and State Bank of Bikaner were
amalgamated to form State Bank of Bikaner & Jaipur
1969 14 major Indian Commercial banks were nationalized
1980 6 more were added on to constitute the Public sector banks.
Thus, there are 19 Banks in the public sector excluding State Bank of
India and its 7 associate Banks (formerly called ‘Subsidiaries’)
Is the same currency (with same number) kept for the client
who has deposited that amount and given to them when they
come for withdrawal ?
Why do we lend money to other needy people ?
Can we lend whole amount or do we have to keep some
amount with the Bank ?
 Structure of Banking Industry in India

Non- scheduled
Scheduled Regional Rural
Commercial
Commercial Banks Banks Banks

Co-operative Banks
Financial Institutions
Scheduled Commercial Banks –
Second Schedule to the RBI Act contains a list of Banks which are described as
“Scheduled Banks”. A Bank in order to be designated as a Scheduled Bank,
should have Paid up capital & reserve – 5 lakh (sec. 42(6) of RBI Act)

Now, this minimum limit is 100 crore . The Scheduled Banks are also required
to maintain a deposit with RBI in the form of Cash Reserve Ratio (based on its
demand & time liabilities) i.e. cash in liquid form (cash + Bal. in current A/c’s
with nationalized Banks – as prescribed by RBI).

Privileges enjoyed by Scheduled Banks :

• Greater safety & prestige value
• Refinance facility
• Currency chest facility
• RBI helps in case of temporary finance difficulties

Non- Scheduled Banks : Any other Bank not included in second schedule of
RBI Act.
Nationalized Banks :
• These include 14 Banks nationalized on 19th July 1969 and 6 Banks
nationalized on 15th April 1980.
• These are also called Public Sector Banks.

Emergence of Universal Banks :

A Universal Bank is a ‘one-stop’ supplier for all financial products & activities
like
• Deposits
• Loans
• Insurance
• Investment Banking

Advantages of ‘one-stop-shopping’ is :-
• It saves transaction costs
• Increases the speed of service
• Insurance Regulatory & Development Authority (IRDA) has allowed an
‘arms-length’ relationship between a bank and an insurance entity.
• This means that commercial Banks can enter insurance business either by
acting as agents or by setting up joint ventures with insurance cos.
Central Bank
The name ‘Central Bank’ is given to that Bank which is entrusted with
the task of controlling the issue of money and regulating all other
banks of the country. The task involves both expansion and contraction
of the volume of money in the country.

Nature of Central Banking :

• It does not aim at profit but at national economic welfare
• It does not compete with the member banks
• It is the apex body of the Banking structure of the country
• It has overall control over the country’s financial system
• It is generally free from political influence
• It has a special relationship with the govt. & with commercial
Banks
Functions of Central Bank :

• Issuance of notes and regulation of the volume of currency

• Acts as banker to the govt.
• Acts as banker to Banks
• Acts as custodian of country’s reserves
• Acts as lender of the last resort
• Functions as the Central Clearing house
• Acts as the controller of credit
• Publishes economic and banking statistics
• Economic development of the country
• Supervises activities of Banks and Financial Institutions
Role of RBI :

The RBI was constituted under The RBI Act 1934 to regulate the issue
of Bank notes and the maintenance of reserves with a view to securing
the monetary stability in India and generally to operate the currency
and credit system of the country to its advantage.

Functions of RBI :

• Traditional
• Promotional
• Supervisory
Traditional functions :

• Monopoly of Note Issue

• Banker to the Government
• Agent and Advisor of the Government
• Banker to the Banks
• Acts as National Clearing House
• Lender of the Last resort
• Acts as the controller of credit
• Custodian of the Foreign Exchange reserves
• Exchange control
• Maintaining the Value of Rupee
• Publishes the Economic statistics and other Information
• Fights against Economic crisis
Promotional functions :

• Promotion of Banking habits

• Refinance for Export Promotion
• Facilities for Agriculture
• Facilities to Small scale Industries
• Help to Co-operative Sector
• Prescription of minimum Statutory Requirements for Banks

Supervisory functions :

• Granting licenses to Banks

• Inspection and Enquiry
• Administration of the Deposit Insurance Scheme
• Periodical Review of the working of Commercial Banks in India
• Control of the Non- Banking Financial Companies
Organizational Structure

The affairs of the RBI are managed by a Central Board of Directors

which consists of :
• The Governor and not more than four Deputy Governors appointed
by the Central Govt.
• Four Directors nominated by the Central Govt. one from each of the
four Local Boards
• Ten Directors and One Govt. official nominated by the Govt. of
India
The RBI has four Local Boards with Head Quarters at :
• Mumbai
• New Delhi
• Chennai
• Kolkata

The Local Boards comprise of five members each and they are
appointed by the Central Govt. to represent territorial and economic
interests.

The Chairman of the Central Board of Directors is the Chief Executive

authority of the Bank, also known as the Governor. The Governor has
the powers of general superintendence and direction on the affairs and
business of the Bank.