Banking

3
Lesson 15
Banking
While walking in the streets of any town or city you might have seen some signboards on
buildingswith names-Canara Bank, Punjab National Bank, tate Bank of !ndia, "nited
Commercial Bank,etc# What do these names stand for$ %id you ever try to know about
them$ !f you enter any such building you will find some kind of a business office# &ou
will see some em'loyees sitting behindcounters dealing with visitors standing in front of
them# &ou will find that some are de'ositingmoney at one counter while some are
receiving money at another counter# Behind the counters inthe office you will see tables
and chairs occu'ied by officers# (n one side of the office you willalso see a chamber
)small 'artitioned room* where the manager is sitting with 'a'ers on his table#+his is the
office of a ,Bank-#.et us know in detail about banks and their activities#
15.1Objectives
/fter studying this lesson, you will be able to0
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state the meaning of ,bank-2
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e3'lain the role of ,banking-2
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identify the different ty'es of banks2 and
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describe the functions of a commercial bank#
15.2Meaning of Bank
&ou know 'eo'le earn money to meet their day-to-day e3'enses on food, clothing,
education of children, housing, etc# +hey also need money to meet future e3'enses on
marriage, higher education

Business tudies
4
of children, house building and other social functions# +hese are heavy e3'enses, which
can bemet if some money is saved out of the 'resent income# aving of money is also
necessary for oldage and ill health when it may not be 'ossible for 'eo'le to work and
earn their living#+he necessity of saving money was felt by 'eo'le even in olden days#
+hey used to hoard moneyin their homes# With this 'ractice, savings were available for
use whenever needed, but it alsoinvolved the risk of loss by theft, robbery and other
accidents# +hus, 'eo'le were in need of a 'lace where money could be saved safely and
would be available when re5uired# Banks aresuch 'laces where 'eo'le can de'osit their
savings with the assurance that they will be able towithdraw money from the de'osits
whenever re5uired# Peo'le who wish to borrow money for business and other 'ur'oses
can also get loans from the banks at reasonable rate of interest#Bank is a lawful
organisation, which acce'ts de'osits that can be withdrawn ondemand# !t also lends
money to individuals and business houses that need it#Banks also render many other
useful services 6 like collection of bills, 'ayment of foreign bills,safe-kee'ing of
jewellery and other valuable items, certifying the credit-worthiness of business,and so
on#Banks acce't de'osits from the general 'ublic as well as from the business
community# /ny onewho saves money for future can de'osit his savings in a bank#
Businessmen have income fromsales out of which they have to make 'ayment for
e3'enses# +hey can kee' their earnings fromsales safely de'osited in banks to meet their
e3'enses from time to time# Banks give two assurancesto the de'ositors 6 a#afety of
de'osit, and b#Withdrawal of de'osit, whenever needed(n de'osits, banks give interest,
which adds to the original amount of de'osit# !t is a greatincentive to the de'ositor# !t
'romotes saving habits among the 'ublic# (n the basis of de'osits banks also grant loans
and advances to farmers, traders and businessmen for 'roductive 'ur'oses#+hereby banks
contribute to the economic develo'ment of the country and well being of the 'eo'le in
general# Banks also charge interest on loans# +he rate of interest is generally higher
thanthe rate of interest allowed on de'osits# Banks also charge fees for the various other
services,which they render to the business community and 'ublic in general# !nterest
received on loansand fees charged for services which e3ceed the interest allowed on
de'osits are the main sourcesof income for banks from which they meet their
administrative e3'enses#+he activities carried on by banks are called banking
activity# ,Banking- as an activity involvesacce'tance of de'osits and lending or
investment of money# !t facilitates business activities by 'roviding money and certain
services that hel' in e3change of goods and services# +herefore, banking is an im'ortant
au3iliary to trade# !t not only 'rovides money for the 'roduction of goods and services
but also facilitates their e3change between the buyer and seller#&ou may be aware that
there are laws which regulate the banking activities in our country#%e'ositing money in
banks and borrowing from banks are legal transactions# Banks are alsounder the control
of government# 7ence they enjoy the trust and confidence of 'eo'le# /lso banks de'end a
great deal on 'ublic confidence# Without 'ublic confidence banks cannot survive
15.3Distinction between banks and moneylenders
&ou may be thinking that a bank is like a moneylender who 'rovides funds to borrowers
andcharges interest on the loan# But it is not so# / bank is 5uite different from a
moneylender# / bank 'erforms two main functions# 8irstly, it acce'ts de'osits, and on
that basis it lends money#+he moneylenders, on the other hand, advance money out of
their own 'rivate wealth and usuallydo not acce't de'osits from others# +he following
table shows the distinction between a bank and moneylender#
BasisBanks Moneylenders
9#:ntityBank are organised institutions#;oneylenders are individuals#<#/ctivityBanking
activities/ctivities of moneylender include acce'tancemay not includeof de'osits as well
asacce'tance of de'osits#lending
of money#3#ClientsBanks meet the needs;oneylenders meetof 'eo'le in generalthe needs
and the businessof agriculturists andcommunity in 'articular#'oor 'eo'le#4#ecurityBanks
acce't tangible;oneylenders generallyand 'ersonal securityacce't gold, jewelleryagainst
loans#or land as securityfor giving
loan#=#Process of+he 'rocess of+he 'rocess of recovery ofrecovery isrecovery isloans#fle
3ible#rigid and strict#>#!nterest ?ate!nterest charged by?ate of !nterest banks on loan isis
decided by the moneylender governed by ?B!#and is normally very high#
15.!ole of Banking
Banks 'rovide funds for business as well as 'ersonal needs of individuals# +hey 'lay a
significantrole in the economy of a nation# .et us know about the role of banking#
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!t encourages savings habit amongst 'eo'le and thereby makes funds available for
'roductiveuse#
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!t acts as an intermediary between 'eo'le having sur'lus money and those re5uiring
moneyfor various business activities#
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!t facilitates business transactions through recei'ts and 'ayments by che5ues instead of
Currency

Business tudies
>
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!t 'rovides loans and advances to businessmen for short term and long-term 'ur'oses#
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!t also facilitates im'ort e3'ort transactions#
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!t hel's in national develo'ment by 'roviding credit to farmers, small-scale industries
andself-em'loyed 'eo'le as well as to large business houses which lead to balanced
economicdevelo'ment in the country#
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!t hel's in raising the standard of living of 'eo'le in general by 'roviding loans for
'urchaseof consumer durable goods, houses, automobiles, etc
15.5"y#es of Banks
+here are various ty'es of banks which o'erate in our country to meet the financial
re5uirementsof different categories of 'eo'le engaged in agriculture, business,
'rofession, etc# (n the basis of functions, the banking institutions in !ndia may be divided
into the following ty'es0+y'es of
BanksCentral Bank %evelo'ment Banks'ecialised Banks)?B!, in !ndia*):@!; Bank !
%B!, N/B/?%*Commercial BanksCo-
o'erative Banks)i*Public ector Banks)i*Primary Credit ocieties)ii*Private ector Banks
)ii*Central Co-o'erative Banks)iii*8oreign Banks)iii*tate Co-o'erative Banks

Banking
A
a$ %entral Bank
/ bank which is entrusted with the functions of guiding and regulating the banking
system of acountry is known as its Central bank# uch a bank does not deal with the
general 'ublic# !t actsessentially as Bovernment-s banker, maintain de'osit accounts of all
other banks and advancesmoney to other banks, when needed# +he Central Bank
'rovides guidance to other bankswhenever they face any 'roblem# !t is therefore known
as the banker-s bank# +he ?eserveBank of !ndia is the central bank of our country#+he
Central Bank maintains record of Bovernment revenue and e3'enditure under various
heads#!t also advises the Bovernment on monetary and credit 'olicies and decides on the
interest ratesfor bank de'osits and bank loans# !n addition, foreign e3change rates are also
determined by thecentral bank#/nother im'ortant function of the Central Bank is
the issuance of currency notes, regulating their circulation in the country by different
methods# No other bank than the Central Bank can issuecurrency#
b$ %ommercial Banks
Commercial Banks are banking institutions that acce't de'osits and grant short-term
loans andadvances to their customers# !n addition to giving short-term loans, commercial
banks also givemedium-term and long-term loan to business enter'rises# Now-a-days
some of the commercial banks are also 'roviding housing loan on a long-term basis to
individuals# +here are also manyother functions of commercial banks, which are
discussed later in this lesson#
"y#es of %ommercial banks&
Commercial banks are of three ty'es i#e#, Public sector banks,Private sector banks and
8oreign banks#)i*
'(blic )ector Banks
0 +hese are banks where majority stake is held by the Bovernment of !ndia or ?eserve
Bank of !ndia# :3am'les of 'ublic sector banks are0 tate Bank of !ndia,Cor'oration
Bank, Bank of Boroda and %ena Bank, etc#)ii*
'rivate )ectors Banks
0 !n case of 'rivate sector banks majority of share ca'ital of the bank is held by 'rivate
individuals# +hese banks are registered as com'anies with limitedliability# 8or e3am'le0
+he Cammu and Dashmir Bank .td#, Bank of ?ajasthan .td#,%evelo'ment Credit Bank
.td, .ord Drishna Bank .td#, Bharat (verseas Bank .td#,Blobal +rust Bank, Eysya
Bank, etc#)iii*
*oreign Banks
0 +hese banks are registered and have their head5uarters in a foreign country but o'erate
their branches in our country# ome of the foreign banks o'erating in our country are
7ong Dong and hanghai Banking Cor'oration )7BC*, Citibank, /merican:3'ress
Bank, tandard F Chartered Bank, Brindlay-s Bank, etc# +he number of foreign banks
o'erating in our country has increased since the financial sector reforms of 9GG9#
c$ Develo#ment Banks
Business often re5uires medium and long-term ca'ital for 'urchase of machinery and
e5ui'ment,for using latest technology, or for e3'ansion and moderniHation# uch
financial assistance is 'rovided by %evelo'ment Banks# +hey also undertake other
develo'ment measures like
ubscribing to the shares and debentures issued by com'anies, in case of under
subscri'tion of the issue by the 'ublic# !ndustrial 8inance Cor'oration of !ndia )!8C!* and
tate 8inancialCor'orations )8Cs* are e3am'les of develo'ment banks in !ndia#
d$

%o+o#erative Banks
Peo'le who come together to jointly serve their common interest often form a co-
o'erativesociety under the Co-o'erative ocieties /ct# When a co-o'erative society
engages itself in banking business it is called a Co-o'erative Bank# +he society has to
obtain a licence from the?eserve Bank of !ndia before starting banking business# /ny co-
o'erative bank as a society isto function under the overall su'ervision of the ?egistrar,
Co-o'erative ocieties of the tate#/s regards banking business, the society must follow
the guidelines set and issued by the ?eserveBank of !ndia#
"y#es of %o+o#erative Banks
+here are three ty'es of co-o'erative banks o'erating in our country# +hey are 'rimary
creditsocieties, central co-o'erative banks and state co-o'erative banks# +hese banks are
organiHedat three levels, village or town level, district level and state level#)i*
'rimary %redit )ocieties
0 +hese are formed at the village or town level with borrower and non-borrower members
residing in one locality# +he o'erations of each society arerestricted to a small area so that
the members know each other and are able to watch over the activities of all members to
'revent frauds#)ii*
%entral %o+o#erative Banks
0 +hese banks o'erate at the district level having some of the 'rimary credit societies
belonging to the same district as their members# +hese banks 'rovide loans to their
members )i#e#, 'rimary credit societies* and function as a link betweenthe 'rimary credit
societies and state co-o'erative banks#
15.,*(nctions of %ommercial Banks
+he functions of commercial banks are of two ty'es#
)/*Primary functions2 and)B*econdary functions#.et us discuss details about these
functions#
-i$ 'rimary f(nctions
+he 'rimary functions of a commercial bank include0a*/cce'ting de'osits2
and b*Branting loans and advances#a*
.cce#ting de#osits
+he most im'ortant activity of a commercial bank is to mobilise de'osits from
the 'ublic# Peo'lewho have sur'lus income and savings find it convenient to de'osit the
amounts with banks#%e'ending u'on the nature of de'osits, funds de'osited with bank
also earn interest#
b$/rant of loans and advances
+he second im'ortant function of a commercial bank is to grant loans and advances# uch
loansand advances are given to members of the 'ublic and to the business community at a
higher rateof interest than allowed by banks on various de'osit accounts# +he rate of
interest charged onloans and advances varies according to the 'ur'ose and 'eriod of loan
and also the mode of re'ayment#
I

Banking
99
ii$ )econdary f(nctions
!n addition to the 'rimary functions of acce'ting de'osits and lending money, banks
'erform anumber of other functions, which are called secondary functions# +hese are
as follows-a#!ssuing letters of credit, travellers che5ue, etc# b#"ndertaking safe custody of
valuables, im'ortant document and securities by 'rovidingsafe de'osit vaults or
lockers#c#Providing customers with facilities of foreign e3change dealings#d#+ransferring
money from one account to another2 and from one branch to another branch of the
bank through che5ue, 'ay order, demand draft#e#tanding guarantee on behalf of its
customers, for making 'ayment for 'urchase of goods, machinery, vehicles
etc#f#Collecting and su''lying business information#g#Providing re'orts on the credit
worthiness of customers#i#Providing consumer finance for individuals by way of loans on
easy terms for 'urchaseof consumer durables like televisions, refrigerators,
etc# j#:ducational loans to students at reasonable rate of interest for higher studies,
es'eciallyfor 'rofessional courses
0%O1%L2)3O1
/ bank is an institution that acce'ts de'osits from 'ublic and lends money to the
'eo'lewho need it#
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Banking is an im'ortant au3iliary to trade#
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Banks encourage savings and act as an intermediary between de'ositors and borrowers#
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+hey hel' in credit transactions, facilitate e3'ort and im'ort, hel' in national
develo'mentand raise 'eo'le-s standard of living#
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+y'es of banks-+he Central Bank, ?B! in !ndia, acts as the government banker and issues
currencynotes in the country# !t also acts as the banker-s bank#-+he Commercial Banks
'rovide short and medium term loans and charge interest on it#+hey are of three ty'es 6
Public ector Banks, Private ector Banks and 8oreign Banks#-%evelo'ment banks lend
funds to business for medium to long term#-Co-o'erative banks are formed to serve
common interest of members# !n !ndia, we havePrimary Credit ocieties )village level*,
Central co-o'erative Banks )district level* andtate Co-o'erative Banks )tate level*#-
:@!; Bank 'rovides guidance and su''ort to e3'orters and im'orters#-N/B/?% hel's
in financing agricultural and other rural activities#
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8unctions of Commercial Banks0- Primary functions include acce'ting de'osits, granting
loans, advances, cash,credit, overdraft and discounting of bills#- econdary functions
include issuing letter of credit, undertaking safe custodyof valuables, 'roviding consumer
finance, educational loans, etc#
1
:-banking0 With advancement in information and communication technology, banking
is 'erformed electronically through Credit Card, %ebit Card and /+;, etc