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Class 11 Finance Chapter 3 Different Types of Banks
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Different Types of Banks
Chapter : 3
VERY SHORT TYPE QUESTIONS & ANSWERS
1. What is the name of the Central Bank of India? When was it established?
Ans: The Reserve Bank of India, 1935.
2. When was the State Bank of India recognized as the commercial bank?
3. Which is the largest commercial bank of India?
Ans: The State Bank of India.
4. When were the first development banks set up in India?
Ans: In 1948 with the Industrial Finance Corporation of India
5. Name two development banks that have been working in the north-eastern states.
Ans: North East Development Finance Corporation and Assam Financial Corporation.
6. When and where the first Investment Banks were established?
Ans: The first Investment Bank was established in Germany in the year 1850.
7. Which bank is known as the “Entrepreneur of Entrepreneurs”?
Ans: Investment Bank.
8. Name some industrial banks of India.
Ans: Some of the industrial banks of India are Industrial Finance Corporation of India (IFCI), Industrial Development Bank of India, State Financial Corporations, Industrial Investment Bank of India, etc.
9. What are Agricultural Banks? Name some agricultural banks of India.
Ans: Agricultural Banks are those banks which provide short term and long term credit to the farmers to meet their requirements. Some of the Agricultural Banks of India are NABARD, and Development Bank, Regional Rural Banks, etc.
10. What are International Banks? When did they come into existence?
Ans: International Banks are the financial institution that operates at the international level and deals with international financial matters of the world. They came into existence after the Second World War, in the Britton woods conference of the U.S.A in 1944.
11. Where was the first Land Development bank set up?
Ans: It was established in Germany, followed by France, England etc.
12. When were the first land development banks established in India?
Ans: It was established at Thang in public in 1920.
13. State the meaning of International Bank.
Ans: The financial institutions who operate banking business at the international level and provide loans to different countries for various projects are called International Banks. For example IBRD, IMF, IDA, etc.
14. Give the meaning of the Central Bank.
Ans: The Central Bank is the apex of the monetary structure of a country. According to Kent, a Central Bank is an institution charged with the responsibility of managing the expansion and contraction of the volume of money in the interest of general public welfare.
15. What is Exchange Bank?
Ans: Exchange banks help in payments being made between different countries and promote international trade. They do so by purchasing, selling, discounting, drawing or accepting bills of exchange arising out of foreign trade. They advance loans against shipping and other documents.
16. What is an Investment Bank?
Ans: The Banks which mainly meet the medium term and long term financial needs of the Industries are called investment Banks. It is also known as Industrial Bank.
17. What is a Savings Bank?
Ans: The specialised institutions which induce small traders, small income based people, artisans, workers etc. to save something out of their incomes is called Savings Banks..
SHORT & LONG TYPE QUESTIONS & ANSWERS
1. Write a short note on Regional Rural Banks.
Ans: Regional Rural Banks (RRB):
(a) These are special types of commercial Banks that provide concessional credit to agriculture and rural sector.
(b) RRBs were established in 1975 and are registered under a Regional Rural Bank Act, 1976.
(c) RRBs are joint ventures between the Central government (50%), State government (15%), and a Commercial Bank (35%).
(d) 1996 RRBs have been established from 1987 to 2005.
(e) From 2005 onwards the government started the merger of RRBs thus reducing the number of RRBs to 82.
(f) One RRB cannot open its branches in more than 3 geographically connected districts.
2. What is a Commercial Bank?
Ans: Commercial banks are the oldest institutions having a wide network of branches throughout the country. A commercial bank is a monetary institution which serves the interest of its depositors by utilising their funds in profitable ventures and providing a variety of services to its customers. Commercial banks may either be owned by the Government or may be run in the private sector. Besides deposit mobilisation, the commercial banks provide not only short-term loans but also medium and long term loan to trade and industry.
3. What are Co-operative Banks?
Ans: Cooperative banks are private sector banks. A cooperative bank is a voluntary association of members for self help and caters to their financial needs on a mutual basis. These banks are also subject to control and inspection by the Reserve Bank of India. Such banks get their resources from their shares, public deposits and also loans from the state cooperative banks. They also get short and medium term loans from the Reserve Bank of India. To enhance public confidence in cooperative banks, the Reserve Bank of India has extended the Credit Guarantee Scheme to cooperative banks.
4. What are Land Development Banks?
Ans: These banks provide long term credit to agriculture for purposes such as pump sets, tractors, digging up wells, land improvement, etc. These banks raise their resources mainly by flotation of debentures, subscribed by the State Bank Group, commercial banks, LIC and by RBI. These banks grant loans to farmers against the security of their land. The land development banks cannot be strictly called banking institutions because they are not required to mobilise deposits and not to maintain cash reserve ratio.
5. What are Regional Rural Banks?
Ans: The main objective for setting up the RRBs was to provide credit and other facilities, especially to small and marginal farmers, agricultural labourers, artisans and small entrepreneurs in rural areas. The RRBs are sponsored by scheduled banks, usually a nationalised commercial bank.
6. What are Industrial Banks?
Ans: These banks have come up to promote rapid industrial development. Such banks provide medium and long term loans to the industrial sector. They also do underwriting of public issues by the corporate sector and guarantee. They render other services like identification of suitable projects, preparation of project reports, providing technical advice and managerial services, raising standards of management, etc. We have a number of such banks in India, namely, Industrial Development Bank of India (IDB), Industrial Finance Corporation of India (IFCI), Industrial Credit and Investment Corporation of India Ltd. (ICICI), Industrial Reconstruction Bank of India (IRBI), etc.
7. What is the Central Bank?
Ans: Every country has a Central Bank of its own. It is called a Central Bank because it occupies a central position in the monetary and banking system of the country and is the highest financial authority. It is the apex bank and the statutory institution in the money market of a country. In India, the Reserve Bank of India is the central bank.
The main function of this bank is to regulate and supervise the whole banking system in the country. It is a banker’s bank and controller of credit in the country. It has the sole right of note issue. It is a lender of last resort and custodian of foreign exchange of the country
8. Explain the function of Co-operative Bank.
Ans: The main functions of Co-operative Banks are –
(a) To pool the surplus resources, if any of the member societies.
(b) To raise deposits from the public.
(c) To use the resources for lending to the needy societies to meet their growing requirements.
(d) To provide the managerial skills required in the management of the banking business and
(e) To Supervise and guide the affiliated societies.
9. What do you mean by Scheduled banks and Non-Scheduled?
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 Jafter must fulfil the some conditions. 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.
10. What is an Export-import bank? Explain briefly.
Ans: The bank which is mainly concerned with the progress and development of foreign trade is known as Export-import Bank or EXIM bank. These banks were established under the Export-Import Bank of Indian Act of 1983. It acts as an apex institution relating to import and export finance.
Some of the features of EXIM Bank are:
(a) These banks are basically foreign trade banks.
(b) The authorised capital of EXIM Bank of Rs. 200/- crore which is now extended to Rs. 450/- crore.
(c) The EXIM bank is managed by a Board of Directors which consists of 16 members including one Chairman.
(d) They provide financial assistance to exports and imports.
11. What are the functions of EXIM Bank?
Ans: The functions of EXIM Bank are:
(a) To provide financial assistance to export-import sectors for the export and import of goods and services.
(b) To provide technical and administrative assistance to the foreign trade oriented parties for their promotion.
(c) To undertake merchant banking services of concerns.engaged in foreign trade.
(d) To finance research and technology studies for the promotion of foreign trade.
12. What is Retail Banking and Wholesale Banking?
Ans: Retail banking is a form of commercial banking which generally deals with small consumers for meeting current requirements of consumers such as housing loans, car loans etc. Wholesale banking refers to a situation where a bank deals with limited large-sized big customers. Thes banks have large accounts for a few corporate clients with few transactions.
13. What do you mean by Indigenous banker? What are the various categories of indigenous bankers? Mention its features defects.
Ans: An individual or a firm accepting deposits, dealing in indigenous bills and leading money is known as Indigenous bankers. Indigenous banks are the unorganised, unregulated, unsupervised and segmented banking institutions that have no link with the organised sector. They have been operating in India since the Vedic age. They are confined to certain casts such as jains, banias, Seths, etc.
The features of Indigenous bank or bankers are:
(a) They are the unorganised part of the financial market. They have no links with the organised and monetary authority of the country
(b) They are unit banks and operate at one place only.
(c) They provide loans for both productive and unproductive purposes. They operate the banking on their own funds.
(d) They are confined to certain casts such as jains, banias, Seths, etc.
The Indigenous bankers suffer from the following defect:
(a) The financial resources of these bankers are insufficient to meet the demand of the borrowers.
(b) These bankers are charging much higher interest rates from their borrowers than the commercial banks.
(c) These bankers indulged in all types of malpractice and exploited their customers in many ways.
(d) They sometimes issued loans for unproductive purposes.
14. Write a short note on IMF.
Ans: INTERNATIONAL MONETARY FUND (IMF) is an international monetary organisation established by different countries after the world war second with an objective of providing exchange stability throughout the world and increasing liquidity, so that balanced multilateral trade is promoted through the cooperation of the member nations. The IMF came into existence in December 1945 and started functioning in March, 1947.
The objectives of I.M.F are:
(a) To promote international monetary cooperation through a permanent institution.
(b) To secure stability in the rates of foreign exchanges.
(c) To secure conversion of the currency of any member into the currency of any other member.
(d) To make financial resources available to members.
The functions of IMF are:
(a) It functions as a short credit institution.
(b) It provides machinery for the orderly adjustments of exchange rates.
(c) It keeps reserves of the currencies of all member countries.
(d) It lends to the borrowing countries in the currencies which they require.
(e) It promotes the expansion of International Trade for the mutual benefits of member countries.
15. What are the functions of Investment Banks?
Ans: The functions of Investment Banks are:
(a) To accept deposits from the public as savings.
(b) To provide long term funds to business and industrial organisations to meet their capital requirements.
(c) To subscribe to the shares and debentures issued by industrial concerns.
(d) To underwrite the issues of shares and debentures and help selling these securities to the investing public.
16. Write short notes on the following:
Ans: (A) Central Banking: The central bank is the apex bank of the country and it is interested in maintaining the economic stability and promoting economic development. It is a special institution which regulates the entire banking structure and maintains monetary stability. It is the banker to the government and it is the leader of all banks in the country. It operates the currency and credit system. It functions in close cooperation with the government and actively assists the government in the implementation of its economic policies. It works in the best interests of the nation not merely for prophets. It has the monopoly right to issue currency notes It maintains the internal and external value of the currency.
(B) They Commercial Bank (2016): The commercial banks pool together the savings of the community and arrange for their productive use. supply the financial needs of modern business. They accept deposits from the public which are repayable on demand or on short notice. They cannot afford to invest their funds in long-term securities or loans. Their business is restricted to financing the short-term needs of trade and industry. They provide the working capital required by trade and industry in their day to day transactions.
They can not afford to supply the block capital required for the purchase of fixed assets. They also render a number of subsidiary services such as collection of bills and cheques, safe keeping of the valuables of their customers, etc. They grant loans is the form of cash of credits and overdraft. They provide short term accommodation by discounting the bills of exchange. Commercial Banks, in general advance loans for short periods to industry and agriculture.
(C) Retail Banking (2008): Retail Banking means undertaking of small business activities by a bank. It is the nature of business operation that has undergone sea change but not the bank itself. As such retail banking is not a separate and district type of bank by itself. These commercial banks that take special interest in mobilising small savings and lending small amounts of finance.
Under compelling circumstances the banks have adopted to retail business. The opening of large number of rural branches under direction has shown the banks about the vast resources in the form of small savings. At the same time it has opened up avenues for deployment of credit. Introduction of financial reforms has led to intense competition among banks and non banking financial institutions in the mobilisation of deposits.
Bankers have found that retail lending is more remunerative than corporate lending. The lending rate in case of retail loan is 3% to 4% higher than prime lending rate, whereas corporate. The lending rate is 1% to 2% higher than the prime lending rate. Hence, the margin of profit in case of small loan is higher.
(D) Exchange Banks (2008): Exchange banks help in payments being made between different countries and promote international trade. They do so by purchasing, selling, discounting, drawing or accepting bills of exchange arising out of foreign trade. They advance loans against shipping and other documents.
(E) Regional Rural Banks: The Regional Rural Banks are a type of scheduled commercial banks. These are public sector banks. The RRBs operate like other commercial banks. They have also supplied rural credit to a limited extent. But it has been enjoyed by the economically strong and well to do villagers. Hence, the weaker section, marginal farmers, landless labourers, rural artisans, cotton industries remained starved for credit and other banking services.
Objective: The main objective of setting up of RRBs was to fill the gap of institutional credit. The banks are to assist in the development of rural economy by providing credit and other facilities to small and marginal farmers, agriculture, small entrepreneurs, artisans, cottage industries, weaver etc. The RRBs are aimed at playing an important role in the development of agriculture trade, industries and other productive activities in the rural sector.
Functions: Under the provision of section 5(b) of Banking Regulation Act 1949 RRB accepts deposits from public repayable on demand or otherwise and withdrawable by cheque or otherwise. It lends and invests money and sec. b(ii) permits RRB to perform other functions performed by other commercial banks.
Moreover the RRBs undertake special business of (i) granting loans and advances to small and marginal farmers, agricultural labourers and to co-operative society (ii) granting of loans and advances to diverse artisans, small entrepreneurs and person of small means engaged in trade, commerce and industries and other productive activities within its area of operation
(F) Investment Bank (2016, 17): Investment Banks are also known Industrial Banks. They supply the long-term needs of industries. They their fend through share capital, debentures and long term deposit on the public. They assist business corporations and government agencies raise funds for long-term capital requirements by issuing bonds.
They middlemen between the business corporations and the government agencies and the investors. Generally they underwrite the fresh issue shares and debentures of business corporations. They also purchase the entire issue of new securities of companies and later on place them before the public for subscription at a higher price.
(G) Development Bank (2016): Development Banks are those banks which perform the twin functions -(i) Providing medium and long term finance to private entrepreneurs and (ii) Performing various promotional roles conducive to economic development. These Banks are development oriented Banks. As for example IDBI, IFCI, SFC, ICICI are
These banks are unlike ordinary Commercial Bank in the following ways:
(i) They do not accept deposits from the public as ordinary banks do.
(ii) They specialise in providing medium and long-term finance whereas commercial banks have specialised in provision of short term finance.
(iii) They are not mere purveyors of long term finance like any ordinary term lending institution.
(H) Co-operative Bank: Co-operative banks are an important constituent of the Indian financial system. It forms an integral part of the banking and credit system in India. In rural finance the role of co-operative has been important and will remain important in future.
Co-operative banking forms a part of the vast super structure of cooperative institutions. In India co-operative banking was initiated mainly after enactment of co-operative legislation in 1904. Co-operative banks are organised and managed on co-operative principles and regulated by its special legislative provision. They are expected to supply institutional credit to rural areas for agricultural and allied activities.
The important features of co-operative banks are briefly mentioned below:
(i) These are organised and managed on the principles of co-operation; self-help and mutual help. Its motto is “one member one vote”.
(ii) They work on a “no profit, no loss” basis. It may earn profit but its aim is service rather than the goal of profit maximisation.
(iii) Co-operative banks may render all sorts of banking services, still they are different from commercial banks.
(iv) They are foster child of the government as these are sponsored, supported and subsidised by financial institutions.
(v) It is the most favoured banking sector. The RBI plays a promotional role rather than regulatory in case of co-operative banks.
(vi) There are co-operative banks for short-term and Land Development banks for long term credit.
(vi) There are scheduled and non scheduled.
(viii) operative banks. The sources of funds of the co-operative banks are Central and State Government, RBI, NABARD, other sister institutions, ownership funds, deposits etc.
(I) Agricultural Banks: These types of Banks are mostly found within y agricultural countries. These banks do not lend money to every one, but only to their members. They give loans for short as well as long periods. The rate of interest usually is very low. Their object is not to make profits, but to help agriculture sector. Farmers need short term credit to purchase seeds, manure etc. medium term credit for the cattle implements etc. and long term credit for permanent improvements on farms like digging well etc. All these needs are met by these banks.
(J) Indigenous Bankers (2016, 17): Indigenous bankers are defined as individuals or firms who deal in hundies and lend money, whether they accept deposits or not. Indigenous banking is the monopoly of certain castes. They may be moltanis, Marwaris, Bengalees, Gujratis, Chen bankers have offices and branches in several centres of the country. The branches are managed (Agent). The agent obtains instructions from periodical accounts to head office and the branche e inspected by the indigenous bankers.
There are some indigenous bankers who deal only in banking business of indigenous bankers whose principal business is trade. There are another group who mainly deal in trade and limit banking business to their surplus funds.
The position of indigenous banker in the banking structure of our country is unique. They play an important role among various agencies catering to needs of trade and industry. They not only provide working capital but also long term capital needs of industries against the securities of shares or fixed assets. Even some indigenous bankers subscribe to the debenture of industry. Loans are generally granted on within promissory notes. Rate of interest mainly depends on security offered. Money is also lent on mortgage of houses and other immovable properties. They draw and discount hundis
(K) Savings Bank (2015): Savings Banks are specialised institutions which induce small traders, small income based people, artisans, workers etc. to save something out of their incomes. They pool the small savings of the poor and middle income sections of the society. They are not banks in the true sense of the term. Their primary object is to promote and collect savings, from small deposits. They accept deposits of even every small amounts from their customers. They offer interest on these deposits.
The depositors are allowed to withdraw their deposits in times of need. But there are a number of restriction on the withdrawals. Such restrictions are imposed only with a view to preventing indiscriminate withdrawals from the accounts. The savings banks encourage the habit of thrift among the people. The small amounts collected from a large number of people are made available for productive purposes.
(L) Land Development Banks: These types of banks meet the capital requirements of the farmers for medium and long term loans. They need long term capital to purchase land, plough, machines, tractors, cattle,irrigation, fencing, drainage and also medium term credit for seeds, manure materials etc. These land development banks provide long term loans to farmers against security of land and property upto 2/3 of the value of the security. Earlier, these were called land mortgage banks.
(M) EXIM Bank: The Export-Import Bank of India was set up on January 1982. It is the apex financial institution in the field of financing foreign trade of India. The Exim Bank provides financial assistance to exporters and importers. It also acts as a principle financial institution for coordinating the working of other institutions engaged in financing of exports and imports of goods and services. It provides refinance facilities also to the commercial institutions against their export-import financing activities.
The main functions of Exim Bank are:
(i) As a statutory corporation of the government of India, its main function is financing of export from and imports into not only India, but also third countries, of goods and services.
(ii) Financing of joint ventures in foreign countries.
(iii) Financing of export and import of machinery and equipment on lease basis.
(iv) Providing loans to an Indian Party so as to enable it to contribute in the share capital of a joint venture in a foreign country.
17. State the differences between Central Bank and Commercial Bank.
Ans: Central Bank:
(a) The central bank is the apex institution of the monetary and banking system of the country.
(b) The Central Bank controls the monetary system and the overall credit operations of the bank.
(c) The central bank is not profit making Institution.
(d) The central bank is normally owned by the state.
(e) The central bank is closely related to the Government as its banker, agent and advisor.
(f) The Central bank helps in establishing financial institutions so as to strengthen money and capital markets in a country.
(g) The Central Bank possesses the monopoly of note issue.
(a) The commercial bank is only a constituent unit of the banking system.
(b) The Commercial Bank is subordinate to the central bank.
(c) The commercial bank is a profit making Institution.
(d) The commercial banks are mostly privately owned.
(e) The commercial banks act as bankers and advisors to the general public.
(f) The commercial bank helps industry by underwriting shares and debentures.
(g) This right is no longer held by the commercial banks now.
18. State the differences between Commercial bank and Co-operative Bank.
Ans: Commercial Bank:
(a) It is established and managed according to the provision of general Banking law.
(b) The commercial banks expand their business by opening branches in different areas.
(c) It can be organised by minimum 7 (seven) members in the form of public company.
(d) It provides short term loans to business of the country.
(e) The major portion of loans provided by commercial banks are on a short term basis.
(f) The Commercial Banks operate their business in foreign countries also.
(a) It is organised and managed according to the provisions of co-operative Act.
(b) It expands business by opening branches and with the help of some allied units such as Apex Bank, Central Co-operative Bank and primary societies.
(c) It can be organised by minimum of 10 (ten) members.
(d) It provides land mainly to the rural and Agricultural sectors.
(e) The co-operative land Development Bank provides long term loans.
(f) It operates business in limited area or state or within a particular area of the country.
19. Mention the various types of Bank.
Ans: The different types of Banks are:
(a) Central Bank
(b) Commercial Bank
(c) Exchange Bank
(d) Regional Rural Bank
(e) Investment Bank
(f) Development Bank
(g) Co-operative Bank
(h) Agricultural Bank
(i) Indigenous Bank
(j) Savings Banks
(k) Land Development Bank
(l) EXIM Bank etc.
20. Describe the characteristics of Regional Rural Bank.
Ans: Following are the special features of RRB:
(a) Regional Rural Banks are set up mainly in under banked and unbanked regions of the country.
(b) RRBs function as a low cost institution, with the staff drawn from the district or the state in which the banks are located.
(c) Their approach to rural credit is sectorial. They are to operate in compact areas of not more than two or three districts.
(d) RRBs are expected to operate on low speeds or margins because they are to land to weaker sections at lower rates of interest.
(e) They enjoy some concessions in regard to cash reserve ratio, and interest rate on deposits.
(f) They grant direct loans and advances only to small and marginal ami artisans and others of small means for productive
21. Describe the functions of land Development Bank.
Ans: The land development banks grant loans on the security of agricultural properties. The period of loans runs to several years say 20 to 30 years Generally loans are granted against first mortgage of agricultural properties. In a few cases they also advance loans against the security of second mortgage on agricultural properties. They lend upto 50%, of the value of the land only. They charge very reasonable rates of interest. This enables the needy farmer to obtain funds for long periods.
Land Development Banks provide credit for a variety of purposes. Loans are granted for making improvements on land, for liquidation of prior debts, for purchasing costly agricultural machinery and equipment, sinking of wells and installation of pump sets and in certain special cases for the purchases of land. In recent years, the farmers have been borrowing from the land development banks mainly for the purpose of sinking of wells and for purchase of agricultural implements and machinery. The Reserve Bank insists that the banks should grant loans only for productive purposes which are easily identifiable.
22. State the nature of Retail Banking.
Ans: Retail Banking means undertaking small business activities by a bank. It is the nature of business operations that has undergone sea change but not the bank itself. As such retail banking is not a separate and district type of bank by itself. These are commercial banks that take special interest in mobilising small savings and lending small amounts of finance.
Under compelling circumstances the banks have adapted to retail business. The opening of a large number of rural branches under direction have shown the banks about the vast resources in the form of small savings. At the same time it has opened up avenues for deployment of credit. Introduction of financial reforms has led to intense competition among banks and non banking financial institutions in the mobilisation of deposits.
Bankers have found that retail lending is more remunerative than corporate lending. The lending rate in case of retail loans is 3% to 4% higher than the prime lending rate, whereas the corporate lending rate is 1% to 2% higher than the prime lending rate. Hence, the margin of profit in case of small loan is higher.
23. Explain the characteristics of Indigenous Bankers.
Ans: The features of Indigenous Bankers are:
(a) The Indigenous Bankers accept deposits from the public. It mobilises the scattered savings from small investors mainly farmers, artisans etc.
(b) They give loans to the small productive units like agriculture, artisans etc. not fully catered by the Commercial Banks.
(c) They have cordial relationships with the customers.
(d) The Indigenous bankers deal in hundies. They write hundis and buy and sell hundies.
(e) They charge a higher rate of interest from their borrowers than those charged by commercial banks.
(f) The Indigenous banking system is highly unorganised and segmented.
(g) They work independently of the RBI No. Control of RBI.
(h) The Indigenous bankers keep secrecy about their accounts and activities.
(i) They provide prompt and flexible credit.
(j) They are readily accessible.