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AHSEC - Class 12: Banking Notes | Commercial Banking in India for Feb' 2021 Exam | 30% Reduced

AHSEC CLASS 12 NOTES FOR 2021 EXAM
SUBJECT: BANKING
Unit – 1: Commercial Banking In India

Short Answer type Questions and Answers (1/2 Marks)

1. Name the first modern bank of India and the world.

Ans: First modern bank of India: Bank of Hindustan – 1770.

First bank of the world: Banca Monte dei Paschi di Siena – 1397.

2. Mention the names of the Presidency Banks?              2018

Ans: (i) The Bank of Calcutta Founded in 1806 but renamed as The Bank of Bengal in 1809. (ii) The Bank of Bombay (1840) and (iii) The Bank of Madras (1843).

3. In which year the Imperial Bank of India Act was passed? When Imperial Bank comes into existence?              2014

Ans: The Imperial Bank of India Act was passed in 1920. It comes into existence on 27th January 1921.

4. How was the Imperial Bank of India formed?               

Ans: According to the provision of Imperial Bank of India Act 1920, the Imperial Bank was established by amalgamating the three presidency bank i.e. Bank of Bengal (1809), Bank of Bombay (1840), and Bank of Madras (1843). It came into existence on 27th January 1921.

5. What was the previous name of SBI?                                2015

Ans: The previous name of SBI was Imperial Bank of India.

6. In which year the Imperial Bank of India was nationalized?                    2013

Ans: On July 1, 1955 and it is renamed as State Bank of India. SBI is now the biggest commercial bank of India.

7. How many Associate Banks/Subsidiaries of SBI are there?                 2018

Ans: There are at present 6 Associated Banks of SBI which are as follows:

a)      State Bank of Bikaner and Jaipur.

b)      State Bank of Hyderabad.

c)       State Bank of Indore.

d)      State Bank of Mysore.

e)      State Bank of Patiala.

f)       State Bank of Travancore.

The State Bank of Bikaner and the State Bank of Jaipur merged into one in 1963 and in July 2008 state bank of Saurashtra was merged with the State Bank of India.

8. What do you mean by Nationalization of Banks?

Ans: Nationalisation of Banks refers to transfer of ownership and management of banks from private individuals and shareholders to the public authorities.

9. In which year fourteen Indian Commercial Banks were nationalized? 15. How many commercial banks are nationalized at present?                         2012, 2016

Ans: On 19th July, 1969 14 commercial banks were nationalized. In 1980, 6 more banks are nationalized. In Sept 1993, the New Bank was merged with the Punjab National Bank. So, at present there are 19 nationalised banks.

10. How many public sector banks in India?                        2012

Ans: 27, the examples of public sectors banks are as follows: The Bank of India, The Bank of Baroda, United Bank of India, and The Union Bank of India.

11. How many private sectors bank in India? Give two example of Private Sector Bank in India.                2013

Ans: According to RBI website, there are 21 private sector banks. Examples are AXIS Bank Limited, Yes Bank Limited, South India Bank Limited, and ICICI Bank Limited.

12. What are Foreign Banks?

Ans: The banks which are incorporated outside under the law of home country but have a place of business in other country are called foreign banks. At present there are 45 foreign banks in our country.

13. Mention two foreign banks leading in India?

Ans: These are: Bank of Tokyo, Standard Chartered Bank, and City Bank.

14. In which schedule of RBI Act, the scheduled Banks is listed?

Ans: In the Second Schedule of the RBI Act, 1934.

15. What do you mean by scheduled banks?                      2012, 2016, 2019

Ans: Scheduled banks refer to those banking institutions whose names are included in the Second Schedule of the Reserve Bank of India Act, 1934. Moreover, the banking company may included in scheduled list only after must fulfill the some conditions.

16. What do you mean by Non-Scheduled banks?

Ans: Non-Scheduled banks refer to those banking institutions, whose names do not appear in the Second Schedule of the RBI Act, 1934. Non-Scheduled banks were engaged in lending money discounting and collecting bills and in providing various agency services.

17. In which year the Lead Bank Scheme introduce?                       2012, 2017

Ans: The Lead Bank Scheme was introduced in December, 1969.

18. What is Co-operative Bank?

Ans: Co-operative banks are those banks which are established in co-operative sector. These banks have developed in India since 1919. Usually they consists of co-operative credit societies and central and State co-operative banks.

19. What is a Bank/commercial bank? Mention its features.

Ans: In simple words, we can say that Bank is a financial institution that undertakes the banking activity i.e.it accepts deposits and then lends the same to earn certain profit.

The features of a Bank are:

a)      A Bank is a profit seeking commercial enterprises.

b)      It deals in money, i.e., it accepts deposits from the public and advances loans to the needy borrowers.

c)       It deals with credit. It creates credit for the purposes of lending money.

d)      The deposits made with the bank are repayable on demand and can be withdrawn by the depositor by means of any instruments whether a cheque or otherwise.

Long answer type questions (3/5/8 Marks each)

Q. 1. Write short note on foundation and management of Imperial banks in India.          2013, 2018

Ans: According to the provision of the Imperial Bank of India Act, 1920, the Imperial Bank was established by the amalgamation of the three presidency bank i.e. the Bank of Bengal (1809), Bank of Bombay (1840), the Bank of Madras (1843). It came into existence on January 27th, 1921. Most of the capital of this bank was external and its management was also in the hands of British. After independence, the imperial bank was nationalised in the year 1955 and is renamed as State Bank of India with a view to provide credit facilities in rural areas.

Under the Imperial Bank of India Act, 1920, the banks were managed by a Central Board of Directors. There were three local boards at the three presidency towns. The local boards had fairly wide powers to manage the local business. They were under the control of the Central Board.

The Imperial Bank performed both Central and commercial banking business. The major central banking functions discharged by the bank before the establishment of the RBI were as follows:

a)      It acted as the sole ‘banker to the Government and as the custodian of public funds and Government cash balances.

b)      It acted as a banker’s bank.

c)       It acted as an exchange bank and performed foreign trade.

In addition to these central banking functions the Imperial Bank performed ordinary commercial banking business such as:

a)      Accepting deposits.

b)      Making loans and advances etc.

c)       Remitting funds from one place to another.

d)      Providing safe custody of valuables etc.

Q. 2. Write a short note on SBI including its objectives, functions and role.         2012, 2014, 2015, 2016, 2017, 2019

Ans: The State Bank of India was established under the State Bank of India Act, 1955, by nationalizing the Imperial bank of India with the object of extending banking facilities in rural areas. It came into existence on 1st July 1955. Though Imperial Bank was important banking institution in 16th April 1955, SBI bill was passed on 8th May 1955 by the Government of India. SBI was organized depending on the recommendation of All India Rural Credit Survey Committee (AIRCSC) which was appointed by RBI in 1951.

SBI is managed by Central Board of directors. In this Board, there is one chairman, one vice-chairman two managing directors and sixteen directors (Total 20 members). The head quarter of SBI is located at Mumbai and its local offices at Kolkata, Mumbai, Chennai, New Delhi, Lucknow, Ahmadabad, Hyderabad, Bhubaneswar, Bangalore, Guwahati etc. It performed all the functions performed by commercial banks. Besides it, SBI performed as an agent of RBI where there is no branch of RBI

The objectives of establishment of SBI are as follows:

a)      To extend banking facilities on a large scale, particularly in the rural urban and semi-urban areas.

b)      To promote agricultural finance and remove the defects in the system of agricultural finance.

c)       To helps the RBI in implementing its credit policies.

d)      To help the Government to pursue its broad economic policies.

e)      To held the RBI in regulating other commercial banks

f)       To act as an clearing agent of banks

Functions of State Bank of India:

As an agent of RBI, the SBI performs certain Central Banking functions such as:

1.       Bankers to Government : As an agent of the RBI, SBI acts as banker to the Central and State Government as a bankers as a adviser as a agent into their capacities :

a)      As a bankers.

b)      As an agent.

c)       As an advisor.

As a Government banker the SBI performs the following functions:

a)      It maintains and operates deposit account of the central and state governments.

b)      It receives and collects payment on behalf of the Central and state governments.

c)       It makes payments on behalf of the central and state governments.

d)      It provides short term advances to government for which are called ways and means advances etc.

As a Government agent the SBI perform the followings functions:

1)      Collect tax and other payments on behalf of the government.

2)      Raise loan from the public and thus manages public debts.

3)      Transfer funds and provide remittances facilities to the government etc.

2.       Banker’s Bank: As an agent of the RBI, SBI acts as a banker to all the other banks.

a)      Custodian of cash reserve of the bank: As an agent of the RBI, SBI acts as the custodian of cash reserve of the banks.

b)      Clearing agent: In India the central clearing functions is managed by the RBI or the SBI is authorized to manage clearing house functions every day. Each commercial bank receives a number of cheques for collection from other banks on account of their customers.

Other functions of the SBI as General Banks act

A) Primary functions:

a)      Acceptance of deposits: It is the most important function of a bank. Under this function, bank accepts deposits from individuals and organizations and finances the temporary needs of firms.

b)      Making loans and advances: The second important function of banks is advancing loan. The commercial bank earns interest by lending money.

c)       Investments of Funds: Besides loans and advances, banks also invest a part of its funds in securities to earn extra income.

d)      Credit Creations: The Bank creates credit by opening an account in the name of the borrower while making advances. The borrower is allowed to withdraw money by cheque whenever he needs.

B) Secondary functions of a bank: This function is divided into two parts

1)      Agency functions: These functions are performed by the banker for its own customer. For these bank changes certain commission from its customers. These functions are:

a)      Remittance of Funds: Banks help their customers in transferring funds from one place to another through cheques, drafts etc.

b)      Collection and payment of Credit Instruments: Banks collects and pays various credit instruments like cheques, bill of exchange, promissory notes etc.

c)       Purchasing and Sale of securities: Banks undertake purchase and sale of various securities like shares, stocks, bonds, debentures etc. on behalf of their customers.

d)      Income Tax Consultancy: Sometimes bankers also employ income tax experts not only to prepare income tax returns for their customer but to help them to get refund of income tax in appropriate cases.

e)      Dealings in Gold/Silver: The buying and selling of gold and silver.

2)      General Utility functions: These are certain utility functions performed by the modern commercial bank which are:               

1.       Locker facility: Banks provides locker facility to their customers where they can their valuables.

2.       Traveler’s cheques: Bank issue travelers cheques to help their customers to travel without the fear of theft or loss of money.

3.       Gift cheque: Some banks issue gift cheques of various denominations to be used on auspicious occasions.

4.       Letter of Credit: Letter of credit is issued by the banks to their customers certifying their credit worthiness. Letter of credit is very useful in foreign trade.

5.       Foreign Exchange Business: Banks also deal in the business of foreign currencies.

Q. 4. Explain briefly unit banking and branch banking.   2012, 2016, 2018, 2020

Ans: The different forms of banking system are as follows:

a) Unit Banking (2013): It is a system of banking where an independent bank undertakes banking function in a particular area. The operation of a unit bank is limited to a particular area and hence this system is also known as “localized banking. A unit bank has just one office with no branches. This banking system was originated and developed in the USA.                  

Advantages of Unit Banking (2012): Unit banking system has the following advantages:

1. Easy Management: The management and control of unit banks is much easier and effective due to the small size and operations of the banks.  There are fewer chances of fraud and irregularities in the financial management of the unit banks.

2. Localised Banking: Unit banking is localized banking. The unit bank has the specialised knowledge of the local problems and serves the requirements of the local people in a better manner than branch banking. Since the bank officers of a unit bank are fully acquainted with the local needs, they cannot neglect the requirements of local development.

3. Quick Decision: A great advantage of unit banking is that there is no delay of any kind in taking decisions on important problems concerning the unit bank.

4. No Monopolistic Tendencies: Unit banks are generally of small size. Thus, there is no possibility of generating monopolistic tendencies under unit banking system.

5. Promotes Regional Balance: Under unit banking system, there is no transfer of resources from rural and backward areas to the big industrial commercial centres. This tends to reduce regional in balance.

6. Initiative in Banking Business: Unit banks have full knowledge of and greater involvement in the local problems. They are in a position to take initiative to tackle these problems through financial help.

Disadvantages of Unit Banking: The following are the disadvantages of unit banking system:

1. Limited Scope: The scope of unit banking is limited. They do not get the benefits of large scale operations.

2. No. Distribution of Risks: Under unit banking, the bank operations are highly localised. Therefore, there is little possibility of distribution and diversification of risks in various areas and industries.

3. Inability to Face Crisis: Limited resources of the unit banks also restrict their ability to face financial crisis. These banks are not in a position to stand a sudden rush of withdrawals.

4. Operates only in urban areas and big towns: Unit banks, because of their limits resources, cannot afford to open uneconomic banking business is smaller towns and rural area. As such, these areas remain unbanked.

5. Difference in Interest Rates: Since easy and cheap movement of does not exist under the unit banking system, interest rates vary considerably at different places.

6. Local Pressures: Since unit banks are highly localised in their business, local pressures and interferences generally disrupt their normal functioning.

b) Branch Banking: Branch Bank is a type of banking system under which the banking operations are carried with the help of branch network and the branches are controlled by the Head Office of the bank through their zonal or regional offices. Each branch of a bank will be managed by a responsible person called branch manager who will be assisted by the officers, clerks and sub-staff. In England and India, this type of branch banking system is in practice. In India, State Bank of India (SBI) is the biggest public sector bank with a very wide network of 16000 branches.

Merits of Branch Banking                            2016

1.       Benefits of large Scale Production: Due to large scale production, the cost per unit of operation is very low in case of this system.

2.       Distribution of Risks: There is a distribution of risks because the losses incurred by one branch are made up by the profits earned by other branches.

3.       Effective Central Bank control: Due to presence of few big banks in the banking system, the RBI can effectively and easily regulate the activities of banks.

4.       Public Confidence: Branch banking system gains greater public confidence because of its large scale operations and huge financial resources.

5.       Easy transfer of funds: Since the branches of bank under branch banking are spread all over the country, it is easier and cheaper, for it to transfer funds from one place to another.

Demerit of branch banking

1.       Problems of Management: The effective management and control of bank under branch banking system is difficult due to large network of branches.

2.       Delay in Decision Making: Decision making is delayed because the branch manager has to consult with the head office before taking decision.

3.       Ignorance of local heads: Branches follows the policies framed by the head office. The head office and the branch may not be aware of the local conditions.

4.       Monopolistic tendencies: Branch banking encourages monopolistic tendencies. A few big banks can dominate and control the whole banking system.

5.       Regional imbalances: Under branch banking system the financial resources collected in smaller and backward regions are transferred to the bigger industrial centre. This encourages regional imbalances in the country. 

 Q.5. Write the difference between Bank and Unit Banking.       2014

Ans: Difference between Branch Banking and Unit Banking

Basic

Branch Banking

Unit Banking

1.Operational freedom

Less operational freedom because branches are controlled by Head Office.

More operational freedom because of its single unit.

2. Decision Making

Delay is decision making because branches are dependent on Head Office.

Decision making is quick because External consultation is not required.

3. Rate of Interest

Rate of Interest is uniform.

Rate of interest depending on demand and supply of fund. 

4. Cost of Supervision

Cost of Supervision is very high.

Cost of Supervision is less as compared to branch banking.

5. Funds

Funds are transferred from one branch to another.

Funds are localized in one unit.

6. Monopoly

Branch Banking encourages monopolistic tendencies in the banking system.

There is no possibility of monopoly because of its small size.

7. Concentration of power

 

There is concentration of power in the hands of few people.

There is no concentration of power in the hands of few people.

8. Loans and advances

Loans and advances are based on merit irrespective of status.

Loans and advances can be influenced by status.

Q. 6. Define Public and Private sector banks. Also distinguish between them.                   2020

Ans: Public Sector Banks: Public Sector banks are those banks in which the Government has at least 51% shares. Public sector banks are owned and controlled by the Government either directly or indirectly through the RBI. These banks are also known as “National Banks”. Public sector banks are classified into three categories (27 Banks):

a)      State Bank group: It consists of the SBI and its 6 associate banks.

b)      Nationalized Banks: It present there are 19 nationalized banks such as UBI, PNB (founded in 1894 in Pakistan), and BOI etc.

c)       Regional Rural Banks (RRBs): These banks are established with the object of proceeding credit and other facilities in rural areas.

Private Sector Banks: Private Sector banks are those which are owned by private individuals or business corporations. Private sector banks may be classified into two categories:

a)      Indian Banks: these banks are incorporated under the Indian companies Act. At present there are 21 Indian Private Bank. E.g. ICICI Bank Ltd, HDFC Bank Ltd, Federal Bank Ltd, Yes Bank Ltd.

b)      Foreign Banks: These banks are originated outside India but have a place of business in India. At present there are 45 Foreign Banks. E.g. City Bank, Standard Chartered Bank, HSBC Bank, Bank of Tokyo.

Difference between Public Sector Banks and Private Sector Banks

Basic

Public Sector

Private Sector

1.Ownership

Public Sector banks are owned by the Govt. either directly or through the RBI.

Private Sector banks are owned by private individuals or business corporations.

2. Setup

These banks are setup under the special act of Parliament.

These banks are setup under the Companies Act.

3. Aim

These banks aim at saving the Society.

These banks are driven by profit motive. 

4. Foreign Bank

 

Public Sector banks does not include foreign bank.

Private Sector banks may be Indian Banks as well as foreign banks.

5. Area of operation

These banks operated in rural, Semi-urban and Urban areas.

Private Sector banks mainly operated in Semi-urban and Urban areas.

6. Capital

In public sector banks more that 50% of capital or full capital is supplied by the Government.

But, in private sector banks, all total capital is supplied by the shareholders of the bank.

Q.7. Write a short note on Scheduled Bank?

Ans: Scheduled bank refer to those banking institutions whose names are include in the Second schedule of the RBI Act, 1934. Under Sec. 42 (b) (a) are called scheduled bank. On the following conditions these banks are included in Second Schedule and these banks must have to fulfill these conditions:

a)      The bank should have Rs. 5 lakhs as paid up capital and reserve fund.

b)      It should be a corporation but must not be a partnership firm or a single owner firm.

c)       The bank must have to submit its weekly return to the RBI.

d)      Direct control is made providing the following advantages on the scheduled banks and RBI: - (i) Giving direct loans, (ii) Providing transfer facilities, (iii) Clearing house facility.

Q.8. Write a brief note on primary and secondary functions of banks/public sector banks.          2013

Ans: Functions of Bank: Modern banks not only deal in money and credit creation, other useful functions management of foreign trade, finance etc. The meaning of modern banks is used in narrow sense of the term as commercial banks. The various functions of banks are given below:

A) Primary functions:

a)      Acceptance of deposits: It is the most important function of a bank. Under this function, bank accepts deposits from individuals and organizations and finances the temporary needs of firms.

b)      Making loans and advances: The second important function of banks is advancing loan. The commercial bank earns interest by lending money.

c)       Investments of Funds: Besides loans and advances, banks also invest a part of its funds in securities to earn extra income.

d)      Credit Creations: The Bank creates credit by opening an account in the name of the borrower while making advances. The borrower is allowed to withdraw money by cheque whenever he needs.

B) Secondary functions of a bank: This function is divided into two parts:

1)      Agency functions (2013, 2015, and 2017): These functions are performed by the banker for its own customer. For these bank changes certain commission from its customers. These functions are:

a)      Remittance of Funds: Banks help their customers in transferring funds from one place to another through cheques, drafts etc.

b)      Collection and payment of Credit Instruments: Banks collects and pays various credit instruments like cheques, bill of exchange, promissory notes etc.

c)       Purchasing and Sale of securities: Banks undertake purchase and sale of various securities like shares, stocks, bonds, debentures etc. on behalf of their customers.

d)      Income Tax Consultancy: Sometimes bankers also employ income tax experts not only to prepare income tax returns for their customer but to help them to get refund of income tax in appropriate cases.

e)      Acting as Trustee and Executor: Banks preserve the wills of their customers and execute them after their death.

f)       Acting as Representatives and Correspondent: Sometimes the banks act as representatives and correspondents of their customers. They get passports, travelers tickets secure passages for their customers and receive letters on their behalf.

3)      General Utility functions: These are certain utility functions performed by the modern commercial bank which are:                        (2012, 2014, 2016, 2019)

6.       Locker facility: Banks provides locker facility to their customers where they can their valuables.

7.       Traveler’s cheques: Bank issue travelers cheques to help their customers to travel without the fear of theft or loss of money.

8.       Gift cheque: Some banks issue gift cheques of various denominations to be used on auspicious occasions.

9.       Letter of Credit: Letter of credit is issued by the banks to their customers certifying their credit worthiness. Letter of credit is very useful in foreign trade.

10.   Foreign Exchange Business: Banks also deal in the business of foreign currencies.

Q.11. Write a brief note on growth and evolution of banking/public sector banking in India. 2015, 2017, 2018

Ans: The word Bank has been originated from many words. There is no single word or answer to this origin of the word ‘Bank’. According to some economists, the word ‘Bank’ has been originated from the German word ‘Banck’ which means heap or mound or joint stock fund. From this, the Italian word ‘Ban co’ has been derived. It means heap of money. But according to this group, the word bank is derived from the Greek word ‘Banque’ which mean a ‘bench’. It refers to a place where money-lenders and money changers used to sit and display their coins and transact business. Thus the origin of the word ‘Bank’ can be traced as follows.

Bank → Banco → Banque → Bank

Banking industry in India has a long history. It has travelled a long path to assume its present form. The banking industry in Indian started with small money lenders and has now large joint stock world class banks in its fold. The growth of banks in India is discussed below over two eras: A) Pre-Independence Period and B) Post-Independence Period

A) Pre-Independence Period: Banking in its crude from is as old as authentic history. All throughout the period of India history, indigenous bankers and money lenders are recorded to have existed and carried on the business of banking and money lending on a large scale. From the early Vedic period right through the Moghul period as well as that of the East India Company’s rule until the middle of the 19th Century, indigenous bankers were the hub of the Indian Financial System providing credit not only to the trade but also to the Government.

Agency House: The indigenous bankers lost their importance to a certain extent with the advent of the English traders in India. The starting of modern banking in India can be traced to the beginning of the East India Company’s trade relation with our country. The bank of Hindustan was the earliest bank started under European direction in India. The banking business of Agency House could not continue for long. Most of these Houses failed because of their complete disregard towards the principle of banking business. The Bank of Hindustan could not withstand the failure of its parent from and was closed down in 1832.

Presidency Banks (2012, 2017): The banking business of Agency House which survived and continued to carry on trade and banking together was progressively taken over by the Presidency Banks. The three Presidency Banks   viz.:

a) The Bank of Bengal (1809);

b) The Bank of Mumbai (1840); and

c) The Bank of Chennai (1843)

were established under the Charter of the East India Company. These Banks acted as banker to the East India Company at Kolkata, Mumbai and Chennai and performed Central Banking functions for their respective areas.

Principle of Limited Liability: A land-mark development took place in the year 1860. It was in this year the principle of “limited liability” was first applied to the joint stock banks. The introduction of the principle of limited liability promoted the growth of banks in India. By 1895, there were 15 joint stock banks with limited liability in India.

The Swadeshi Movement: Swadeshi movement prompted Indians to start many new institutions. The number of joint stock banks increased remarkably during 1906-1913. The peoples Bank of India Limited, the Bank of India Limited, the Central Bank of India Limited, Indian Bank Limited and the Bank of Baroda Limited were setup during that period.

Imperial Bank of India: The three Presidency Banks were amalgamated into the Imperial Bank of India which was brought into existence on 27th January, 1921, by the Imperial Bank of India Act, 1920. The liability of shareholders of the Imperial Bank was limited like that of shareholders of other banks registered under the Company Act.

Post Independence: The government took major steps in the Indian Banking Sector Reforms after independence. In 1955, it nationalized the Imperial Bank of India (the State Bank of India Act) with extensive banking facilities on a large scale, especially in rural and semi-urban areas as the first phase of nationalization. It formed the State Bank of India (SBI) to as the principal agent of RBI and to handle banking transactions of the Union and the State Governments of the Country.

In 1969, seven subsidiary banks of the State Bank of India were nationalized as a major process of nationalization due to the effort of then Prime Minister Mrs. Indira Gandhi, Later in 1969, 14 Major Private Commercial Banks in the country were nationalized. Again in 1980, 6 more banks were nationalized. In 1993, New bank is merged will Punjab National Bank. So, there are 19 nationalized banks in our country at present.

PHASE III: The third phase of development of Indian banking introduced many more products and facilities in the banking sector in its reform measures. In 1991, under the chairmanship of M. Narsimham, a committee was set up under his name, which worked for the liberalization of banking practices.

Q.13. Write short notes on various types of banks.                          2018

Ans: There are various types of banks which operate in our country to meet the financial requirements of different categories of people engaged in agriculture, business, profession etc. The banking institution may be divided into following types:

A)     Based on the Structure or Organizational Setup: Banks can be of five types based on the structure or organizational setup, viz., unit bank, branch bank, group bank, chain bank and correspondent bank.

1) Unit Bank: Refer above

2) Branch Bank: Refer above

3) Group Bank: Refer above.

4) Chain Bank: Refer above

5) Correspondent Bank: Correspondent Bank is a bank which link two banks of different stature or size. Many Indian banks act as correspondent banks for many foreign banks.

6) Pure Banking: Under pure Banking, the commercial banks give only short-term loans to industry, trade and commerce. They specialize in short term finance only. This type of banking is popular in U.K.

7) Mixed Banking: Mixed banking is that system of banking under which the commercial banks perform the dual function of commercial banking and investment banking, i.e., it combines deposit and lending activity with investment banking. Commercial banks usually offer both short-term as well as medium term loans. The German banking system is the best example of mixed Banking.

8) Regional banking: In order to provide adequate and timely credits to small borrowers in rural and semi-urban areas, Central Government set up Regional Banks, known as Regional Rural Banks all over India jointly with State Governments and some Commercial Banks. As they are permitted to operate in particular region, it may help develop the regional economy.

B) Based on the Ownership: Banks can be of four types based on the ownership. They are public sector banks, private sector banks, foreign banks and cooperative banks.

1) Public Sector Banks: Refer above

2) Private Sector Banks: Refer above

3) Foreign Banks: Foreign Banks are those banks which belong to foreign countries and have their incorporated head office in foreign countries and branch offices in other countries. The share capital of the foreign banks will be fully contributed by the foreign investors. Some examples of foreign banks in Indian include ABM Amro bank, Standard Chartered Bank, JP Morgan Chase Bank and so on.

4) Cooperative Banks: Cooperative Banks are those banks which are run by following cooperative principles of service motive. Their main motive is not profit making but to help the weaker sections of the society. Some examples of cooperative banks in India include Central Cooperative Banks, State Cooperative Banks.

C) Based on the Functions: Banks can be of various types based on the functions they perform. They include savings banks, commercial banks, industrial banks, agricultural development banks, land mortgage/development banks, cooperative banks, exchange banks, indigenous banks, consumer banks, central banks.

a)      Central Bank: Central Bank is known as guardian bank which bank working in the country. Now a days, in every country there is one central bank and is controlled by the govt. The central Bank manages and controls the whole monetary system and also prepares monetary policy and other policies of the govt.

b)      Commercial Bank: The commercial bank generally extent short terms loans to the business man and traders. They collect deposits from the public and advance loans to the businessman and producer commercial banks are normally owned by share holders. In India most of the joint stock banks are commercial banks.

c)       Co-operative Bank: Co-operatives banks are those banks which established in co-operative sectors. Co-operative banks offer short term and medium term loans to the agricultural sector. Farmers get various kinds of loan for purchasing various agriculture inputs from co-operative banks.

d)      Foreign exchange Banks: These are special types of banks which specialize in financing foreign trade. Their main is to make international payments through the purchase and sale of exchange bills.

e)      Industrial banks: Industrial banks are those banks which advance long term loans to industries. For the development of industries various types of industrial banks are established. In India, various institution like Industrial and finance co-operation of India (IFCI), Industrial development bank of India, can be termed as Industrial Banks.

f)       Savings Banks: Savings banks are those banks which offer opportunities for saving to the small savers and also try to develop saving habits among the people.

g)      Development Banks: Development banks are specialized financial institutions which provide medium and long term finance to private entrepreneurs and help in economic development of the country.

h)      Agricultural/Land Development Banks: Agricultural/Land Development Banks are those banks which are known as Land Mortgage or Agricultural Banks as they provide finance to agricultural sector. They provide long term loan for agriculture for the purposes of purchase of new land, purchase of heavy agricultural machinery such as tractor, repayment of old debt, conservation of soil and reclamation of loans.

i)        Investment Banks: Investment Banks are those banks which are specialized in provide medium and long term financial assistance to business and industry. They are also known as Industrial Banks as they are mainly concerned with industrial finance.

j)        Export - Import Bank: These banks have been established for the purpose of financing foreign trade. They concentrate their working on medium and long-term financing. The Export-Import Bank of India (EXIM Bank) was established on January 1, 1982 as a statutory corporation wholly owned by the central government.

k)      Indigenous Bankers: That unorganised unit which provides productive, unproductive, long term, medium term and short term loan at the higher interest rate are known as indigenous bankers. These banks can be found everywhere in cities, towns, mandis and villages.

l)        Rural Banking: A set of financial institution engaged in financing of rural sector is termed as ‘Rural Banking’. The policies of financing of these banks have been designed in such a way so that these institution can play catalyst role in the process of rural development.

Q.14. Write a brief note on social control over banks.    2017

Ans: Social Control over banks: Primary functions of banks are to accept deposit from public and lend it business for its productive use. The banks are the custodian of savings of the public. They mobilises the savings from all sections of the society and channelise them to industries and other by way of granting loans and advances. Previously it was observed that banks are directing their advances to medium and large scale industries and small scale industries and other priority sectors such as agricultural sector is neglected. The main reason behind this problem is that the directors of the banks were mostly industrialists and interested in sanctioning loans to those industries in which they are connected. To overcome these deficiencies found in the working of the banks, the Banking Laws (Amendment) Act was passed in December 1968 and came into force on 1-2-1969. It is known as the scheme of ‘social control’ over the banks.

The main purpose of social control was to make the commercial banks active participation in the social welfare of the masses. The major steps in social control legislation

1. The establishment of the national credit council to formulate new credit policy

2. Appointment of non - industrialist bankers having special knowledge of the working of banking company as chairman of all banks as whole time employee for a term not exceeding five years.

3. Appointment of not less than 51% of professional directors.

4. Prohibition to grant loans or advances or guarantees to directors or a firm in which he is interested and

5. Establishment of a training institute at highest level to improve the technical expertise of bank executives.

The purpose of social control was to achieve the social welfare objective of the government.

Q.15. Write a brief note on the role of banks in the economic development of a country.

Ans: Role of banks/SBI/Commercial banks in the economic development of a country

Banks play an important role in the economic growth of a country. In the modern set up, banks are not to be considered dealers in money but as the leaders of development. The importance of bank for a country’s economy can be explained in following ways:

1. Promote Saving: Banks by playing attractive interest rate on deposits try to promote thrift and savings in an economy. The investment of these savings in productive channel results in capital formation.

2. Channelisation of savings to optimum use: The scattered small savings in the country can be put to optimum use by commercial banks. Banks utilize this amount by giving loans to industrial houses and the government. By providing funds to the entrepreneurs, bank help in increasing productivity of capital.

3. Remittance of money from one place to another: Banks help in remitting money from one place to another. The cheque, bank draft, letter of credit, bills, Hundies enable traders to transfer large sums of money from one place to another.

4. Credit creation: By their ability to create credit, the banks have placed at the disposal of the nation a large amount of money. The bank can increase the supply of money through credit creation.

5. Increase in Employment: With the growth of banking activity, employment opportunity in the country has increased to a considerable extent.

6. Capital formation: The banks help in capital formation in the country. A high rate of saving and investment promote capital formation.

7. Protection of depositor’s property: Money deposited in the bank and other precious items are now absolutely safe. For keeping valuables, banks are providing locker facilities. Now people are free from any type of risks.

Q.16. What is E-Banking? Mention its merits and demerits.                        2019

Ans: E-Banking or Internet banking: Online banking also known as internet banking, e-banking, or virtual banking, is an electronic payment system that enables customers of a bank or other financial institution to conduct a range of financial transactions through the financial institution's website. Internet banking is a term used to describe the process whereby a client executes banking transactions via electronic means. This type of banking uses the internet as the chief medium of delivery by which banking activities are executed. The activities clients are able to carry out are can be classified to as transactional and non transactional.

Advantages of E-banking or Internet banking

1)      Convenience: Banks that offer internet banking are open for business transactions anywhere a client might be as long as there is internet connection.

2)      Low cost banking service: E-banking helps in reducing the operational costs of banking services. Better quality services can be ensured at low cost.

3)      Higher interest rate: Lower operating cost results in higher interest rates on savings and lower rates on mortgages and loans offers from the banks.

4)      Transfer services: Online banking allows automatic funding of accounts from long established bank accounts via electronic funds transfers.

5)      Ease of transaction: The speed of transaction is faster relative to use of ATM’s or customary banking.

6)      Discounts: The credit cards and debit cards enables the Customers to obtain discounts from retail outlets.

Disadvantages of E-banking Internet banking

1)      High start-up cost: E-banking requires high initial start up cost. It includes internet installation cost, cost of advanced hardware and software, modem, computers and cost of maintenance of all computers.

2)      Security Concerns: One of the biggest disadvantages of doing e-banking is the question of security. People worry that their bank accounts can be hacked and accessed without their knowledge.

3)      Training and Maintenance: E-banking requires 24 hours supportive environment, support of qualified staff. Shortage of trained and qualified staff is a major obstacle in e-banking activities.

4)      Transaction problems: Face to face meeting is better in handling complex transactions and problems. Banks may call for meetings and seek expert advice to solve issues.

5)      Lack of personal contact between customer and banker.

Q.17. Write a brief note on recent trends in Indian Banking System.                       2020

Ans: a) Core banking is normally defined as the business conducted by a banking institution with its retail and small business customers. Many banks treat the retail customers as their core banking customers and have a separate line of business to manage small business. Larger business is handled by the corporate banking division of the institution. Core banking basically is depositing and lending of money.

b) Factoring: Factoring is a service of financial nature involving the conversion of credit bills into cash. Accounts receivables, bills recoverable and other credit dues resulting from credit sales appear, in the books of accounts as book credits. Here the risk of credit, risk of credit worthiness of the debtor and as number of incidental and consequential risks are involved. These risks are taken by the factor which purchase these credit receivables without recourse and collects them when due. These balance-sheet items are replaced by cash received from the factoring agent. Factoring is also called “Invoice Agent” or purchase and discount of all “receivables”.

C) Internet /E-Banking: Online banking also known as internet banking, e-banking, or virtual banking, is an electronic payment system that enables customers of a bank or other financial institution to conduct a range of financial transactions through the financial institution's website. Internet banking is a term used to describe the process whereby a client executes banking transactions via electronic means. This type of banking uses the internet as the chief medium of delivery by which banking activities are executed. The activities clients are able to carry out are can be classified to as transactional and non transactional.

Modern Services Provided by Bank through Internet Banking

1.       Centralized Banking Solution (CBS) = CBS, an inter-branch networking and data-sharing platform helps the customers to operate their account from any city in India having CBS networked branches, changing the status of customer from ‘Customer of the Branch’ to ‘Customer of the Bank’.

2.       Online Tax Payment = Banks provide the facility of online payment of service tax, excise duty, DGFT, Custom duty and all charges under MCA 21 through internet banking.

3.       Corporate Internet Banking = Online funds transfer, trade finance management, fund management, global access with unmatched benefits through banks’ corporate internet banking.

4.       Online Shopping = This service facilitates the customers to book hotels, buy gifts, send flowers, buy books and lot of activities by making payments online.

5.       Retail Internet Banking = Internet Banking assists the customers to have an online access to bank account anytime and anywhere.

6.       Foreign Exchange = Banks have several branches authorized for handling foreign exchange business and these branches.

7.       E-Money India = Internet banking helps the customer in sending money to their loved ones in India through PNB’s e-Money India service.

8.       Online Railway Reservation = Say goodbye to long queues. Banks offer the customers online booking and information through IRCTC payment gateway. Just click and travel comfortably.

9.       Depository Service = Banks Depository service provides the facility of having shares and securities in Demat form and executes transactions of sales and purchase hassle free electronically to the customers through internet banking.

10.   Electronic Clearing Service and Electronic Funds Transfer (EFT) = Internet banking assists the customers in electronic clearing service for quick movement of funds in a paperless mode and EFT to ensure an expeditious transfer of funds by using electronic media.

11.   Online Bill Payment = No more queues to pay customers’ bills. Now the customers can pay their telephone, mobile, electricity, insurance and several other bills 24 hours, 365 days, from the desktop of customer.

12.   Online Air Ticket Booking = Banks provide facility of online airline ticket booking of domestic as well as international airlines to their customers through internet banking.

13.   Online Trading = Banks provide online trading facilities to customers having account with bank and trading account with approved brokers.

14.   Customer Care Facility = Banks present 24 hours customer care facility for all customers quarries and problems.

15.   Online Insta Remit-RTGS Service = Instant remittance by customer himself now made possible, from one bank to another bank at different centre’s on the same day with the help of Online Real Time Gross Settlement (RTGS)/National Electronic Fund Transfer (NEFT) at modest charges.

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