Indian Banking System Unit 2 Indian Banking System

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Indian Banking System Unit 2 Indian Banking System

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Indian Banking System Unit 2 Indian Banking System Notes cover all the exercise questions in UGC Syllabus. Indian Banking System Unit 2 Indian Banking System provided here ensures a smooth and easy understanding of all the concepts. Understand the concepts behind every Unit and score well in the board exams.

Indian Banking System

INDIAN BANKING SYSTEM

A. Multiple choice question and answers:

1. Choose the Correct Answer:

(i) Branch banking system was first developed in 

(a) U.S.A.

(b) German.

(c) England.

(d) Russia.

Ans: (c) England. 

(ii) Mixed Banking is a system where banks combine both the functions of

(a) Wholesale and retail Banking.

(b) Deposit Banking and investment Banking.

(c) Regional and Narrow Banking.

Ans: (c) Deposit Banking and investment Banking.

(iii) Correspondent Banking system was highly developed in 

(a) Hungary.

(b) Netherland.

(c) U.S.A. 

(d) England.

Ans: (c) U.S.A.

(iv) Under mixed Banking system commercial banks makes: 

(a) Long term loans to industry.

(b) Short term loans to agriculture.

(c) Short term loans to handicrafts.

Ans: (a) Long term loans to industry.

(v) U.S.A. can rightly be termed as the home of 

(a) Branch banking.

(b) Unit banking.

(c) Deposit Banking.

(d) Group Banking.

Ans: (b) Unit Banking.

(vi) A banking system where business is carried on by a bank through a network of branches spread throughout the country is known as ………..

(a) Unit banking.

(b) Branch banking.

(c) chain banking.

(d) group banking.

Ans: (b) Branch banking.

(vii) ___________ refers to a system of banking in which two or more independent banks are brought under the control of a holding company.

(a) Group banking.

(b) chain banking.

(c) deposit banking.

(d) investment banking.

Ans: (a) Group banking.

(viii) ____________ Banking is a system where banks combine both the deposit banking and invest banking functions. 

(a) Chain banking.

(b) deposit banking.

(c) investment banking.

(d) mixed banking.

Ans: (d) mixed banking.

(ix) Which of the following systems of banking contributes to banking monopoly?

(a) Unit banking.

(b) chain banking.

(c) group banking.

(d) branch banking.

Ans: (d) branch banking.

(x) ____________ is a system under which an individual bank carries on banking business with a network of branches spread all over the country.

(a) Mixed Banking.

(b) Branch Banking.

(c) Unit Banking.

(d) Corresponding Banking.

Ans: (b) Branch Banking.

2. State whether each of the following statements is “true” or “False”.

(i) The system Investment Banking First developed in India in 19th century.

Ans: False.

(ii) Branch Banking System is Popular in India. 

Ans: True.

(iii) Lower cash reserves are required in cash of unit banking system

Ans: False.

(iv) A unit bank has virtually no branches. 

Ans: True.

(v) It is not possible for a Branch Banking System to take care of the individual needs.

Ans: True.

3. Fill in the blanks with appropriate words given in the brackets.

(i) ___________ Banking is a localized banking.

Ans: Unit.

(ii) In Indian, more ___________ of the total banking business is handles by the public sectors commercial banks. 

Ans: 90%.

(iii) Mixed banking lost its popularity in German After ___________ world war).

Ans: 1st world war.

(iv) ___________ arrange long-term funds for business and industry.

Ans: Investment banking.

(v) Group like ___________ comes únder Private banking comes under the private banking.

Ans: Shroofts.

(vi) ___________ are largely urban based.

Ans: Indigenous bankers.

(vii) Regional Rural Banks come into existence on ___________.

 Ans: 2nd october 1975.

4. Indicate the answer you would give for returning the cheques mentioned below, give reasons for your action. 

(i) Cheque, dated of February 1991, Presented in 1st March 1991.

Ans: Date incomplete.

(ii) Cheque, dated 12 March 1991, Presented on 7th January 1991. 

Ans: Post-dated cheque.

(iii) Cheque dated 17th April 1991, Presented on 8th july 1991. 

Ans: It has to be paid.

5. Name two players with targets foot print in the wholesale Banking space.

Ans: SBI and ICICI.

6. Which country is a major location of private banking. 

Ans: Switzerland.

7. Where is the most profit private Banking division? 

Ans: Merrill lynchs.

1. Write short notes on:

(i) Rural Banking and RRB.

Ans: Regional Rural Banks (RRBs) in India are the scheduled commercial banks that conduct banking activities for the rural areas at the state level. As the name suggests, the Regional Rural Banks cater to the needs of the rural and underprivileged people at the regional level across different states in the country. In the following banking awareness study notes let us have a closer look at the RRBs in India: 

(a) The Regional Rural Banks or the RRB government-based banks operate at the regional level in various states across the country.

(b) The RRBs are entrusted to cater to the needs of the rural people in the backward regions and bring  financial inclusion at the primary level.

(ii) Pure and mixed banking.

Ans: 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 the U.K. In the U.K., Special institutions like investment houses, finance corporations were established for providing long-term finance. Hence, it is argued that com­mercial banks should provide only short-term loans. It is stressed on the lines of safety and liquidity.

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.

2. Give a brief review of Indian Banking System. 

Ans: Banking industry in India has traversed a long path to assume its Present stature. It has undergone a major structural transformation after the nationalization of commercial banks in 1969.

During the last two decades of nationalization, there has been a phenomenal expansion of branch network, particularly in the hither to under banked rural areas. Banking industry in our country has faced lot of hurdles and impediments, stresses and strains, but the dynamic fashion in which the banking industry has taken them in its stride and serged a head only demonstrates its resilience and inherent potentialities as catalytic agent for social economic development. The history of the growth of Indian banking therefore, makes an interesting reading. It covers scope from a small money lender with limited resources and area of operation to a large joint stock bank with huge resources and diversified business activities.

3. What does Unit banking mean?

Ans: Unit banking 15 a system where the operations of a bank are confined to a single office located in a particular area. In order to provide facilities to its customers in remittance and collection of funds, a unit bank resorts to correspondent banking system. In case of this system small banks serving small communities place deposits in nearby city banks which in turn hold deposits in giant cities. The giant banks also hold reciprocal deposits of one another consequently every bank gets connected directly or indirectly with each other and it can safely make payment on behalf of other banks.

United states of America can rightly be termed as the home of unit banking system. Though its importance in that country’s banking system is declining after world war II, there is no denying the fact that even today unit banks constitute more than 60% of the total number of banks in U.S.A.

4. What does Branch banking mean?

Ans: Branch banking is a system where a bank with a network of branches throughout the country carries out its banking operations. Sometimes bankers are also opened outside the country. However, small banks may like to restrict their branches or offices to a certain region of the country.

The branch banking system which developed in England is prevalent in most countries of the world including Australia, Canada, South Africa, India, Pakistan etc.

In India, public sector banks numbering 27 in all have more than 90% of the branches of all commercial banks. They also control more than 90% of the banking business in all.

5. Write a note on Correspondent banking.

Ans: Correspondent banking system which is highly developed in the united states provides a mechanism which knits together the unit banking system in the country, correspondent banking consists, basically, in some banks holding demand deposits in other banks just as individuals and business firms hold.

In general, small banks serving small communities place deposits in nearby city banks which in turn hold deposits in the giant banks located in giant cities like New York, Chicago, San Francisco etc. and these giant bank hold reciprocal deposits with one another, consequently, a web network of banking interrelationship is created where by ultimately every bank in the country is connected with every other bank.

In actual practice, the correspondent banking system is more complicated. Than this description since small up country banks typically maintain not one but five or six correspondent relationships and large banks may have 30 or 40 correspondent relationship.

The small bank in the small community which holds deposits which the city bank is the respondent bank while the city bank holding the deposits for the small bank is the correspondent bank.

The correspondent banking system is mutually advantageous both for the respondent and for their correspondent banks. The correspondent bank performs the two important service of outside cheque learning and loan participation for their respondent banks while they benefit from the deposit funds of their respondent banks.

In other word, corresponding banking is such an institution which provides services on behalf of another equal, financial institution. A correspondent bank can conduct business transactions accept deposits and gather documents on behalf of the other financial institutions correspondent banks are more likely to be used to conduct business in foreign countries, and act as a domestic banks agent abroad. This is done because the domestic business may have limited access to foreign financial markets and cannot survive its clients accounts without opening up branches.

6. Briefly mention why the group banking received a great impetus in the USA?

Ans: The development of group banking received a great impetus on account of the restrictions placed on the branch banking by the state government in that country. So, naturally, the group banking in that period received a great encouragement to start its banking business in the country. Beside that the public had a great confidence on it because of its prompt service and efficient management system.

So, in a way, group banking may, therefore be said to be a substitute of branch banking to a considerable degree and many if the advantages of branch banking such as better customer service, economics of scale, or eater mobility etc. are also the important factors claimed for the group banking the country.

Moreover Group banking, in the USA,, received immense importance mainly in the ten states, where the branch banking was fully restricted.

7. Mention the reasons for not extending long term loans to industries by the British Banks.

Ans: There are two main reasons why British Banks do not extend long term loans to industries:

Firstly, The deposits received by the commercial banks in Britain are for short periods only. Since their deposits are short term deposits, they are not in a position to grant long term loans to industries. They would be endangering their liquidity of they were to use their short term deposits for giving long term loans to industries.

Secondly, there is the historical reason why the British banks follow the system of pure banking. The industrial development of Britain was proceeded by the expansion of trade and industry. As a result of this commercial expansion, there had come in the existence a number of institutions, such as, finance corporations, issue houses, investment trusts, etc., which had specialized in giving long term loans to industries. Hence, it was no longer necessary for the newly established commercial banks to extend long term loans to industries.

8. Write about Universal Banking system. 

Ans: Universal banking system has been occupied a prominent role and provide a variety of services through its banking operations. Universal banking perform a lot of financial service, including both commercial and investment services.

Universal banking is common in some European countries including Switzerland. In the united states However banks are required to separate their commercial and investment banking services.

Proponents or universal banking argue that it helps bank better diversify risk. Detractors think dividing up banks operation is a less risky strategy. Universal bank may offer credit loans, deposits, assets management investment advisory payment processing, securities transitions under writing and financial analysis. While a universal Banking System allows banks to offer a multitude of services, it does not require them to do so. Banks in a universal system may still choose to specialize in a subset of banking services.

9. What is Mixed banker system?

Ans: Mixed banker system refers to that banking system under which the commercial banks make long-term loans to industry.

In England commercial banks are mainly concerned with supplying the Short-term credit requirement of trade and commercial. Generally the commercial banks refrain from supplying the long-term credit to the industry. In short the British commercial banking system keeps a look from financing the long-term credit requirements of industries. As against this British trend, the commercial banks in Germany, Belgium, Hungary and the Netherlands have greatly assisted in the industrial development of these countries by giving long-term loans to industries.

In mixed banking, the commercial banks promote the industrialisation of their country and come forward to provide the initial capital to the newly started industries. Alongside the task of providing capital to industries mixed banks also perform the functions of deposit banks. To the extent, commercial banks in India have come forward to provide long-term capital to small and medium-sized industries they can be said to perform the functions of mixed banks.

10. Give a brief idea of deposit banking.

Ans: Deposit banking a system of banking where the banks involve themselves only acceptance of deposits repayable on demand and lending money to trade and industry for short periods not exceeding a year or for meeting working capital requirements. As a matter of fact the term commercial banks in the earlier in the earlier stages was used only for such banks,

In England commercial banks are mainly concerned with short-term credit requirement and hence. England is considered to be the home deposits banking.

11. Write a note on Retail Banking.

Ans: Retail banking is that banking which focuses on providing financial services to individual consumers. It does not focuses on corporate style entities and high value transactions. Many banks typically engage in both wholesale and retail banking.

So, wholesale banking also compares with retail banking which is the provision of banking services to individuals.

Now-a-days big financial houses mainly engage in both retail and wholesale banking. Retail banks engaged in designing new financial products to attract the customers and for that purpose uses sophisticated technology. The aim of the bank is not only to launch the product in the market but also to export the products outside the country. but, it is not yet to be fully. Successful to fulfill its aim. However, the bank has maintained an efficient relationship with its customers.

12. Give a brief idea of investment Banking.

Ans: Investment banking: It is a system where banks arrange long term funds for business and industry. They work both as financiers as well as underwriters. As financiers they themselves provide long-term funds to business and industry. As underwriters they work as middle men between iness corporations and investors. They undertake the responsibility shares or debentures of the corporation to the general Public for commission. In the absence of failure of the Public to subscribe in full, they take the unsubscribed portion of the shares or debentures underwritten by them.

The system was first developed in Germany in the middle of the nineteenth century.

In Indian, after independence a large number of such banks have been established. They are popularly known as development banks.

As the commercial banks are unable to block their capital for a longer period, so they mainly provide short-term funds to the borrowers. But the development banks can provide long-term finance to the industries. They include mainly.

(i) Industrial Development Banks of India.

(ii) Industrial Finance corporation of India.

(iii) Industrial Credit and Investment Corporation of India. and 

(iv) Industrial Reconstruction Corporation of India.

Though the industrial Finance Corporation of India was the first development bank of India established in 1948, but, the industrial Development Banks of India was set up as an apex institution; with substantial financial resources and considerable operational flexibility to meet the base requirements of industries.

13. Make distinctions between unit banking and branch banking. 

Ans: Following are the important distinction between unit banking and branch banking which also include the merits and demerits of both the system of banking.

14. Describe clearly about the Private Banking.

Ans: By ‘private banking’ we refer to the business of accepting non chequable deposits from the public for the purpose of lending or investment. In this group come the short taking non-chequable deposits, finance ‘corporations’ like those which are established in Bangalore and other firm and individuals who accept deposits from the public and engage in lending or investment activities.

Private banking is a term which refers to major institutions banks which offer financial services to private individuals. These banks would normally have two distinct divisions-private banking and corporate banking.

Historically private banking has been viewed as very exclusive only lettering for high new worth individuals with liquidity are $1 million although it is now possible to open some private banks accounts with no more than $50,000. An institution’s private banking division will provide various services. Such as wealth management, savings, inheritance and tax planning for their clients.

The word ‘Private also alludes to bank secrecy and minimizing taxeş via careful allocation of assets. An offshore banks account may be used for this purpose’.

Switzerland is a major location for private banking. Swiss banks hold an estimated 35%. Of the word’s private and institutional offshore funds, or 3 billion Swiss funds.

The private banking industry provides a high-risk, high reward for investors. A carrier in private banking can garner a banking or stockbroker a lefty paycheck if he is successful at managing client investment. The job can also spell the quick demise of a financial barrier if the broker or banker makes unlike decisions and loses client millions of dollars.

15. Write à note on Regional Bank.

Ans: Regional banks are banking institutions that are structured to operate within a defined geographical area or regions within a particular nation. A bank of this type may be limited to a specific state or province, or be licensed to operate in a number or provinces or states within a defined section of a country. In, most instance, a regional bank is a full-service banking operation that is capable of providing the same range of services to their customers as any of the large banking institutions.

The Regional Bank is an alternative to what is known as a money center bank. Money and center banks are full-services banking institutions that are licensed to operate on at lease a country wide scale. It is not unusual for a bank of this type to operate branches and other facilities in two more nations, while many center banks do offer some advantages over a regional Bank in terms of the expanse of the operational network, the two type of banks offer essentially the same types of services.

One of the benefits that many people associate with a Regional Bank is the more conservative approach the institution takes to investing the money of depositors.

In time past, there have been situations where multinational banks experienced severe losses due to investments that exhibited potential for a high return, but ultimately decreased in value due to various circumstances.

By contrast, the Regional banks is more likely to balance speculative investments with option that are considered sound over the long-term and are less susceptible to changes in the economy, acts of nature or the . outcome of political elections.

In terms of services of Regional Bank is often able to provide anything that a large bank can offer.

In some situations, that is accomplished through alliances with other Regional Banks through a network of association. More often, the bank provides the services within their own infrastructure, an aspect that allows customers to feel more of an affinity with the bank, since, it is perceived as part of the local community.

16. Write a note on Narrow Banking.

Ans: A narrow bank is its narrow sense, can be defined as the system of banking under which a bank place its funds in risk free assets with maturity period matching its liability maturity profile, so that there is no problem relating to assets liability match and the quality of assets remain in fact without leading to emergence of sub-standard assets.

A narrow bank has some of the advantages in the sense that it can ensure the regular deployment of funds in low risk liquid assets, with such pattern of deployment of funds, these banks are expected to remove the problems of bank failures and the consequent systematic risk and loss of depositors. 

Though this system has the above mentioned advantages, it suffers from some limitations also.

The system is not very much popular among the public of different regions. The main reason of this is that, it has no proper public. The bank officials are also aware of it and as a result the management of the become weak.

The status of narrow banking in India:

The concept is practically being implemented by the Indian banking system partly as a large part of deposits mobilized (i.e. more than 46%) by the banks has been deposited in Government securities (against a prescription of 25% in the from of SLR) as it provides a safe avenue of investment by a very low return. This keeps the level of non-performing assets (rather than advances) low and the requirement of capital adequacy ratio also low, as the risk weight alloted to such securities is only 25% compare to 100% in loan assets.

1. Difference between Public Sector bank and Private sector bank.

Ans:

2. What is Chain banking? What are its advantages and disadvantages?

Ans: The chain banking system is a variant of the group banking system. This system of banking is very similar to group banking except that the holding company technique is not used with the result that it is difficult to distinguish between the two system of banking. The main feature of the chain banking system is the control of two or more banking companies by a single person, by members of the same family, by the same group of persons through the ownership of stock, through common membership on the board of directors of the banks (interlocking directorates) or other wise.

The chain banking system was developed in the united states of America around the mid-nineteenth century and reached the apex of popularity in the twenties of the century.

In 1925, there were no less than 133 chains comprising of 933 banks in the United States of America and these were mainly concentrated in California, Washington, New York, Idaho, Georgia and Minnesota.

Most chain banking system are seemingly small, being usually confined to two or three banks, although some chains involve substantially larger number of banks. Consequently, The extent of centralization shows wide variations.

Like group banking, the chain banking has also developed largely as a substitute for branch banking and more than 80 percent of the chain banks are located in those states in the U.S.A. which prohibit branch banking.

The chain banking system has more or less the same advantages and disadvantages which are inherent in the group banking system.

The advantages of the chain system are as follows: 

(a) The chain banking has the grater scope to utilize fully its financial resources.

(b) The system can provide the better managerial service as the bank are owned and controlled by one person or a group of persons.

(c) Another advantage of this system is that, it can yield a higher margin of profits as it need not block its money for a longer periods.

(d) Under this system, the diversification of risks is possible which is a major advantage of this system.

(e) Another advantage of the chain banking system is that it needs a minimum operational costs.

(f) Again, this system has a centralized administrative control which helps for the smooth functioning of this banking system.

It should be noted that, the chain banking system is almost similar to the group banking except that the holding company technique is not used under this system.

In spite of having several advantages of the chain banking system. Certain defects are also seems to be there under this system which are as follows: 

(a) Under this system, there is the lack of supervision which may hamper in the growth of this system.

(b) The system is highly inflexible, which is also a major defects of this system.

(c) Moreover, there is the every possibility of performing speculative activities by the banks.

(d) There is also the every possibility of existence of corruption on the part of the offices and the employees of the banks which may make the entire system of the banks weak and inactive.

(e) Sometimes, there may be the concentration of economic power in the hands of the members of the same family and there is every possibility of misuse of power by them.

3. What is Group Banking? What are the features of the Group banking system. What are its advantages and disadvantages?

Ans: Group banking which has expanded phenomenally in the USA since world war – II is a legal form of bank organization in which two or more independently incorporated banks are controlled by a holding company. A holding company is, in turn, a corporate body which own stock in other corporations. Consequently a typical banking group consists of 4, 5 or even more separately chartered commercial banks, with the controlling interest in the stock of each bank owned by an independently incorporated non-bank corporation. There are no restrictions as regards the types of banks which may belong to the group these may be either unit banks or branch banks. Furthermore, group banking may cut across state political boundaries and a holding company may have controlling interest in the banks located in several states in the country.

Under the group banking system, the ownership and operations of two or more commercial banks are controlled directly or indirectly by a corporation, a business trust or an association, usually, the group comprises of a ‘key’ bank which is controlled by a holding company, and a number of smaller or sate unite banks. In the United states of America. The first American corporation controlled the group of 24 banks with a total of 421 banking offices in 1959. The Marten Midland corporation controlled II banks having 171 banking offices. Similarly, the North West Bank corporation controlled 77 banks having 100 banking offices. By the end of 1975, there were 276 groups systems operating in the USA and these controlled 2,122 banks which operated 8,887 branches with total deposits exceeding $287 billions.

Features: 

The chief feature of the group banking system is the centralized management and control of all group units by a holding company notwithstanding that each bank has got a separate entity. The supporters of the group banking system point out that the advantage of this banking system is that it has the capacity to maintain along cash reserves and this cash reserves are maintained or kept by one or more big member banks and they distribute the cash to the smaller unit at the time of emergency. Another feature of group bank that “one-bank holding” companies are not included under the label ‘of group banking’. A “one bank holding” company is a holding company owing, controlling interest in the stock of only a single bank.

In the USA the bank holding company act of 1956 aimed at severely restricting the acquisition of the new banks across the state boundaries.

Advantages/merits:

(a) Firstly group banking enjoys the benefits of economies of scale, as the group banking may be said as the substitute of branch banking to a considerable degree. So it has the similar advantages, which the branch banking enjoy.

(b) Secondly group banking provides better and extensive customer service to the doors of the people who need the service. 

(c) Thirdly under group banking, there is the greater mobility of capital which in common is case of branch banking system.

(d) The management of the group banking is very efficient as the group of the bank is comprises of a key bank. So automatically the management and control of the bank become very strong.

(e) More over the training programmes are organized for the better services of the bank from time to time.

(f) Another merit of this banking system lies in economizing in the maintenance of large cash reserves. It is not necessary for each banking unit forming a group to keep large cash reserves because such cash reserves may be concentrated in one or few bigger member banks of the group who help the smaller member banks as and when necessary.

(g) Furthermore, all members of the group can pool their resources to finance large borrowers.

(h) Moreover advantages of economics of scale in banking operations can be enjoyed by cutting down operating costs, by purchasing supplies in bulk and by improving the efficiency of management.

However, all these merits not withstanding, the group banking system.

Suffers from a number of disadvantages/demerits/limitations which mentioned below:

(a) Firstly, it is difficult to exercise and direct and effective control over the member units, the difficulty of exercising and effective supervision is more serious particularly due to the management of the holding companies using the groups as vehicle for manipulation and speculation.

(b) Secondly, the failure of one member of the group affects all others.

(c) Thirdly it is difficult to supervise all unit simultaneously and the holding company may utilize the surplus reserves of the group for furthering its own economic interests. 

Under the group banking system, a banking company and a non-banking company may be subsidiaries of the same holding company consequently the holding company in order to increase its profits may lock the funds of the banking company and the former may suffer losses in the event of the latter coming to grief.

(d) Fourthy, neither all the constituents can be examined at once nor are they all commonly subject to the jurisdiction of the same supervisor.

(e) Fifty, the group banking system leads to monopoly there by restricting efficiency which grows as a consequence of healthy competition among the banks.

4. Define unit banking? What are the advantages and disadvantages of Unit banking system?

Ans: Unit banking refers to a single, usually very small bank that provides financial services to its local community. Typically, a unit bank is independent and operates without any connecting banks or branches in the area. However, not all unit banks are independent.Unit banking refers to banking practice in which all banking activities are handled by a single branch that is located in a specific area. It is run by either the board members or a dedicated regulatory body. Since no other person, bank, or corporate body has power over it, it has a separate status.

A unit bank uses the corresponding banking system instead of having any physical branches. It is to provide services relating to money transfers and fund collections. A financial institution is referred to as a “correspondent bank” if it engages in a contract with another bank. It is to provide services to its clients on behalf of that bank.

Unit banking system was the following advantages: 

(a) Local development: Unit banking is a localized banking. This bank was the specialized knowledge of the local problem and serves the requirements of the local people in a better manner than branch banking. The funds of the locality are utilized for the local development and are not transferred to other areas.

(b) Reduce Regional in balance: Under unit banking system, there is no transfer of resources from rural and backward areas to the industrial commercial concerns. This tends to reduce regional in balance.

(c) Easy Management: The management and supervision of a unit bank is much easier and more effective than that under branch banking system. There are less chances of fraud and irregularities in the financial management of the unit banks.

(d) 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.

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

(f) No inefficient Branch: Under unit banking system, weal and inefficient branches are automatically eliminated. No Protection is Provided to such banks.

(g) No diseconomies of large scale operations: Unit banking is free from the diseconomies and problems of large scale operations which are generally experienced by the branch banks. 

Disadvantages:

It banking system has the following disadvantages: 

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

(b) No Banking Development in Backward areas: Unit banks, because of their limited resources, cannot afford to open uneconomic banking business in smaller towns and rural areas. As such, these area remain unbanked.

(c) 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.

(d) Lack of specialization: Units banks, because of their small size, are not able to introduce and get advantages of division of, labour and specialization. Such banks cannot afford to employ highly trained and specialized staff.

(e) Costly Remittance of Funds: A unit bank has no branches at other places. As a result, it has depend upon the correspondent banks for transfer of funds which is very expensive.

(f) Local Pressures: Since unit banks are highly localized in their business, local pressures and interferences generally disrupt their normal functioning.

(g) Undesirable competition: As the unit banks are independently run by different management, it results in undesirable competition among different unit banks.

5. Explain branch banking? What are the advantages and disadvantages of branch banking?

Ans: Branch Banking refers to a system in which a bank provides banking services through a wide network of branch offices. If a bank has ten branches in a city, account-holders can choose a nearby branch to make deposits, withdrawals and avail of other services.Branch banking is a system of providing banking services through different offices of a bank that acts as the head branch. The idea is to expand the bank’s business to cater to different locations and provide services to all its customers.The branch office will offer all the services that are offered by the main branch. The main branch controls the operations of the branch office. Each branch has a manager who is responsible for managing all the activities of that branch.

Branch banking system has the following advantages: 

(a) Economies of scale: Under the branch banking system, the bank with a number of branches possesses huge financial resources and enjoys the benefits of large scale operations.

In branch banking system highly trained and experienced staff is appointed which increases the efficiency of management.

Division of labor is introduced in the banking operations which ensures greater economy in the working of the bank. Right persons are appointed at the right place and specialization increases.

Moreover, funds are made available liberally and at cheater rates. Foreign exchange business is done economically.

Large financial resources and wider geographical coverage increases public confidence in the banking system.

(b) Diversification of Risk: In branch banking industrial as well geographical diversification of loan risks is possible. As a result the loss suffered by branches on account of fall in industrial activity in a particular area may be more than compensated on account of profit made by branches in area where there may be boom in business and industrial activity. This is not possible in case of unit banking where a bank is having its operations only in a particular area.

(c) Economy in cash Reserves: Under the branch banking system, a particular branch can operate without keeping large amounts of idle reserves. In time of need, resources can be transferred from one branch to another.

(d) Cheap Remittance Facilities: As the branches are spread over the whole country, it becomes easier and cheaper to transfer funds from one place to another. Beside this the inter branch indebtedness can more easily be adjusted than inter bank independence.

(e) Better customer service: Branch banking provides better service to customers in remittance and collection of funds. Moreover the objective of opening branches is to take banking service to the doors of the people who need them. Thus, service is cheap as well as convenient. Each branch has to handle a limited number of customers of the locality, hence the branch manager can personally look to their problems.

(f) Safety of loans: While lending money, the branch banks follow the policies as laid down by their head office. The chances of favoritisms are therefore reduced to the minimum. Moreover, loans beyond a particular limit are to be approved by the head office as per the prescribed procedure. This all ensures safety of loans and reduces the chances of banks suffering losses due to bad loans.

(g) Greater mobility of capital: Branch banking permits better mobility of capital and thus bring more uniformity in interest rates. Surplus funds can be transferred from one are to another with convenience and speed and thus bring equilibrium in demand and of funds resulting in better returns to the investors.

(h) Banking facilities in Backward Areas: Under the branch banking system, the banking facilities are not restricted to big cities only. They can be extended to small towns, rural areas and also in the underdeveloped areas. Thus, this system helps in the development of backward regions of the country.

(i) Effective control: Under the branch banking system. The central bank can control the banks very efficiently because it has to deal only with few big banks and nor with each individual branch. This ensure better implementation of monetary policy.

(j) Emergence of strong and solvent banks: Branch banks have large resources, better management and greater diversification of risk. All this results in emergence of strong and solvent banks. The chances of bank failures are reduced to the minimum.

Disadvantages:

Branch banking has the following disadvantages:

(a) Problem of management: In case of branch banking system, a number of difficulties as regards management, supervision and control arise.

Since the management of the bank gets contracted at the head office, the managers can afford to be indulgent in their duties and are often involved in serious irregularities while using the funds.

Moreover, the branch manager has to take permission from the head office on each and every matter, this results in unnecessary delay and red Tapism in banking business.

(b) Concentration of economic power: The branch banks have huge resource raised from a wide spectrum of people. The Board of directors of these bank therefore possess immense economic power which they may use for promoting their own business interests. It may thus cause concentration of economic power in a few hands.

(c) Lack of initiative: Branch managers generally lack initiative on all important matters, they cannot take independent decisions and have to wait for the clearance signal from the head office.

(d) Local needs ignored: Branch managers generally lack initiative on all important matters, they cannot take independent decisions and have to wait for the clearance signal from the head office.

(e) Adverse linkage effect: In the branch banking system, the losses and weaknesses of some branches also have their effect on the other branches of the bank.

(f) Inefficient Branches: In this system, the weak and unprofitable branches continue to operate under the protection cover of the large and more profitable branches.

(g) Other Defects: Some other defects of branch banking system are as follows:

(i) Preferential treatment is given to the branches near the head office.

(ii) Higher interest rates are charged in the developed area to compensate for the lower rates charged in the backward areas.

(iii) There is concentration and unhealthy competition among the branches of different banks in bank cities.

(iv) Lot of difficulties have to face when a bank opens branches in foreign countries.

6. What do you mean by correspondent banking? What are the merits and demerits of correspondent banking system.

Ans: A correspondent bank is a financial institution that provides services to another one, usually in another country. It acts as an intermediary or agent, facilitating wire transfers, conducting business transactions, accepting deposits, and gathering documents on behalf of another bank.

Correspondent banking is a crucial component of the global banking system. It allows banks to conduct business and provide services in places where they don’t have a physical presence. This relationship is built on trust, where both banks rely on each other to handle transactions efficiently and securely.

The merits/advantage and demerits/disadvantages of correspondent banks are as follows: The unique American banking system has certain advantages for the country (Unit) banks, the city (branch) banks and for the economy, first, under correspondent banking of country banks are cleared and collected without much delay. Thus there is a rapid movement of funds from one area to the other. This system facilitates trade and industry.

Second, correspondent city banks help the country banks in the buying and selling of securities.

Third, such banks also help the country banks in financing loans and advances by providing them funds.

Fourth, they also accept or draw drafts on the country banks. Fifth, they facilitate forcing exchange transactions of their corresponding banks.

Sixth, they increase the geographical mobility of credit when business is transacted from one area to the other through these banks.

Seventh, city banks also render technical advice to the country banks in installing new machines, providing legal advice, and in marketing investment in securities and advancing loans.

Eight, they also provide information and the general and economic conditions of the country to the unit bank regularly.

Ninth, the correspondent city banks themselves gain in deposits and new business by entering into correspondent relations with the country banks. On the basis of the deposits, the city banks are able to profit more.

Tenth, balances in correspondent banks tend to increase to manifold which provide liquid assets with the result that they can be utilized as a ready source of funds for all banks engaged in corresponding relations.

Last, but not the least, the whole economy benefits from the correspondent banking system, there is no possibility of monopoly banking. The general public can easily transfer funds from one part of the country to the other.

The only demerits of this system is that the correspondent city bank may make excess advances on the basis of the deposits of their correspondent country banks. They may thus, operate against the principles of safety and liquidity and harm only the country banks but also the entire banking structure in the economy.

7. What is Rural Banking? Explain its functions. Discuss its advantage and disadvantages.

Ans: A rural banking may be described as a primary banking institution set up to serve a compact group of villages generally, working as a cooperative bank or as a subsidiary of a commercial bank. Its object is to provide at one place the special type of credit and banking facilities and other related services needed by agriculturists and other rural producers, Generally it should be possible to organize a rural bank for a compact group of villages covering a population ranging from say, 5000 to 20,000. However. In sparsely populated area, it may be necessary to organize a rural bank for as big an área as development block to start with. 

Functions of rural Banks: While the rural banks are basically banks will perform all the banking functions, it will be desirable to enable them to perform certain non-banking functions. Such as constructing and maintaining godowns, supplying, as agents, agricultural inputs and acquiring of agricultural and other equipment for leasing it out, providing assistance in the marketing of agricultural and other products and equipment for leasing it out, providing assistance in the marketing of agricultural and other products and generally helping in the overall development of the villages in their area.

Thus the various functions which a rural bank may be expected to assume in due course may be listed as follows: 

(a) Mobilies local savings by means of the various types of deposits.

(b) Provide short-term and medium term credit for agriculture and other purposes to rural producers and provide long term-loans to agriculturists as agent of the land development bank.

(c) Implement programmes of supervised credit tailored to the needs. of individual farmers.

(d) Provide various ancillary banking services to local people, such as remittance of funds, acceptance of insurance premier, Safe deposit lockers etc.

(e) Set up and maintain godowns.

(f) Undertake supply of inputs and agricultural and related equipments to farmers as agents and in appropriate cases equipment leasing.

(g) Provide assistance in the marketing of agriculture and other products through marketing organizations. and

(h) Generally help in overall development of the villages in its area.

There may be some cultivators and other rural producers who may be in need of a different type of technical help and of a much larger volume of loans than a rural bank would be in a position to provide. Such producers should have access to a branch of a commercial bank.

Advantages:

(a) They provide banking facilities to the rural people who were hitherto not served by the commercial banks.

(b) They help in the development of agriculture and small-scale industries in rural areas.

(c) They promote thrift and entrepreneurship among the rural people.

(d) They create employment opportunities in rural areas.

(e) They help in checking Migration from rural to urban areas.

(f)  They play an important role in the implementation of government schemes like the Integrated Rural Development Programme (IRDP), Minimum Support Price (MSP) scheme, etc.

Disadvantage:

(i) Haste and Lack of Co-ordination in Branch Expansion: Haste in branch expansion programme in many cases has resulted in lopsidedness due to lack of co-ordination. In several cases, it could not be ensured that the branches of the RRBs are opened at centres where no commercial or co-operative banking facilities were provided.

(ii) Difficulties in Deposit Mobilisation: The RRBs encountered a number of practical difficulties in deposit mobilisation. On account of their restrictive lending policy which excludes richer sections of the village society, these potential depositors show least interest in depositing their money with these banks.

(iii) Constraints in Deposit Mobilisation: The RRBs exclude the richer sections of the village society in providing direct financial assistance. These sections have potential savings to deposit. But, they are least interested in depositing them with the RRBs in view of the restrictive credit policy of these banks.

8. Mention why the system of branch banking is suitable in India? Explain briefly the role of branch banking in India. Briefly point out the main features of Branch banking system.

Ans: The system of branch banking is most suitable for the developing country like India. More and more branches are opened in rural and backward areas to encourage saving as well as banking habits in these areas under this system. Funds are transferred from areas with excessive demand for money to areas with deficit demand for money. As a result, the uniform rate of interest prevails in the whole area which is a major advantage for the customers. Moreover, the large financial resources and wider geographical coverage of branch banking system increases public confidence. So in India the public sector banks have more than 90% of the branches of all commercial banks. These banks also control more than 90% of the banking business in all.

Role of branch banking:

The branch banking system Which first developed in England is currently in vogue in most countries of the world. In England, bulk of the banking business is controlled by five big banks which are popularly known as the Big five, i.e. The midland the Lloyds, the Barclays, the Westminster and the National Provincial. These five banks have their branch network spread throughout England and in the overseas territories. The midland bank has a network of over 3,500 branches, the Lloyds of over 2,400. The Barclays of over 2,800 and the National Westminster of over 3,600 branches.

Apart from England, the commercial banking system of Australia, Canada, South Africa, India, Pakistan and many other countries follow the branch banking system.

In India, more than 90 percent of the total banking business is handled by the pubic sector commercial banks comprising the state bank of India together with its seven subsidiaries and the twenty nationalized commercial banks. The state Bank of India alone has a vast network over 7,200 branches spread throughout the country and abroad. Its seven associate banks also have over 3,200 branches. The five larger sized nationalized banks. The bank of India, the bank of Baroda. The central Bank of India, the Punjab National Bank and the United Commercial Bank have their vastly extended network of branches in the country. The State Bank of India, its subsidiaries and the twenty nationalized banks have over 32,000 branches which are more than 80 percent of the total of over 43,000 branches of all commercial banks in the country.

After the nationalization of major commercial banks in the country in 1969, the new branches have been mostly opened in the rural and semi urban areas in order to cater to the banking needs of the agriculturists and poor people in the country.

In the united states, organizational structure of commercial banking system has experienced great changes with a strong secular trend in favours of branch banking. As a consequence, there has been recorded a significant increase both in the number of banks, operating branches and in the total number of branches.

The following are some of the important features of branch banking system:

Features:

(a) The bank is owned by a group of shareholders and controlled by a single board of directors.

(b) The bank has a central office popularly termed as head office of the bank which controls the operations of different branches. 

(c) Each branch is managed by a branch manager who manages the affairs of the branch as per the directives and polices of the head office. 

(d) For external reporting the assets and liabilities of the branches and the head office are aggregated.

9. What should be the Pre-conditions that a private banker should follow to do business in India? What are the advantage and disadvantages of private Banking.

Ans: While the states have enacted money-lending legislation, there is no legislation as regards Private bankers. While those who do business their own resources are brought under regulation (though if may not be very effective now), it is surprising that those who do business or partially with resources obtained by way of deposits from the public are not subject to regulation so long as the undertake such business without incorporating the undertaking.

It should be pre-condition that a private banker should maintain a specified percentage of liquid assets and also posses own funds as may be required to be maintained or possessed, by loaning concerns. There should also be provision for segregation of ‘banker business from the other business of the firm individual. The assets and liabilities of the banking firm should be required to be indicate separately from the other assets and liabilities of the private banker.’

There should also be special provisions for facilitating either the conversion of private banking undertaking into corporate institutions.

Following are the advantages of private banking: 

(i) Personal term A term consisting of professionals is always there to help the customers and their family.

(ii) A private bank client contract enables to carryout all the everyday banking over phone, simply by contacting the term the serving the customers.

(iii) A personal financial strategy will be prepared for the customers least once a year.

(iv) Private banking offers investment management services with a full consultation mandate.

(v) The customers can also meet with the private banking strategist. 

(vi) The customers are served in privacy, meeting are held in the cozy rooms of Private Banking.

(vii) The customers can attend the seminars and other events.

Disadvantages of Private Banks:

(i) Surplus employees: The defect of this system is that some workers are declared surplus. There is an increase in the rate of unemployment or unemployed workers commit crimes in this society.

(ii) No of branches in rural areas: The private banks owner donot like to set up the branches in rural. The banking facilities remain confined to cities where sufficient deposits are available. A large part of population will be deprived of banking facilities.

(iii) Unbalanced growth: The management of privatized banks provide credit in specified areas and people. As a result, there is unbalanced growth in the country especially rural areas may remains under developed where credit facilities do not exist.

(iv) Jobs for relatives: The management of privatized banks may provide jobs to their friends and relatives. The deserving persons are ignored.

(v) Loans for few Persons: The management of privatized banks can extend loans of their favored person. In this way only few persons are benefited.

(vi) Owner association: The aim of privatized banks is to earn profit. For these purpose owners associations are made which into argument of earning high profit. The bank increase the rate of service charges. Such associations may not care for customers welfare.

10. Difference between Narrow and Universal Banking.

Ans: 

11. Write a note on retail banking or personal banking or consumer banking? What are the inherent advantages also the disadvantages of Retail Banking?

Ans: Retail banking, also called personal banking or consumer banking, is financial services geared toward individual customers rather than large corporations. Retail banks offer products like savings accounts and debit cards to the general public, and working in retail banking requires high levels of customer service. Retail banking is a way for individual consumers to manage their money, have access to credit, and deposit their funds in a secure manner.The retail bank plays an important part in the nation’s economic recovery. It enables a better flow of money in the market by providing individuals with loans at a minimal rate of interest. When individuals have enough money, they can easily carry out manufacturing activities, which results in economic growth.Retail banking has inherent advantage out weighting certain disadvantages. Advantages are analyzed from the resources angle and assets angle.

Advantages of the retail banking from the resource side are: 

(i) Retail deposits under this system are stable and it constitution core deposits.

(ii) They are always interest sensitive and less bargaining for additional interest.

(iii) These deposits help to constitute low cost fund for the bank which is a major advantage of retail banking.

(iv) Effective customers relationship management with the retail customers relationship management with the retail customer built a strong customer base.

(v) Another important advantage of retail banking is that it increases the subsidiary business of the banks.

Again, the advantages of the retail banking from the asset side can be point out as follows: 

(i) Retail banking results in better yield and improved bottom line for a bank.

(ii) Retail segment is a good avenue for funds deployment. 

(iii) Consumer loans are presumed to be of lower risk and NPA perception.

(iv) Another important advantage from the assets side is that, it helps economic revival of the nation through increased production activity. 

(v) It helps to improves lifestyle and fulfills aspirations of the people through affordable credit.

(vi) It helps in innovative development credit when required. 

(vii) Retail banking involves minimum marketing efforts in a demand driven economy.

(viii) Diversified portfolio due to huge customer base enables bank to reduce their dependence on few or single borrowers.

(ix) Banks can earn good profit by providing non-fund based or fee based services without deploying their funds.

(x) In Spite of having several advantages of the retail banking, It suffers from the following limitations/disadvantages.

Which are mentioned below:

(i) Designing own and new financial Products is very costly and time consuming for the bank.

(ii) Customer now-a-day prefer net banking to branch banking. The banks that are slow in introducing technology based products, are finding it difficult to retain the customers who which to opt for net banking.

(iii) Customers are attracted towards other financial products like mutual funds etc. which is also an important demerits, has to be considered by the banks.

(iv) Though banks are investing heavily in technology they are not able to explore the same to the full extent.

(v) Another major disadvantage is monitoring and fellow up of hung volume of loan accounts inducing banks to spend heavily in human resources department.

(vi) Long-term loans like housing loans due to its long repayment term in the absence of proper follow-up can become NPAs. 

(vii) The volume of amount borrowed by a single customer is very low as compared to wholesale banking. This does not allow banks to exploit the advantage of earning huge profits from single customers as in case of whole banking.

12. Define universal bank and how does it works? Explain the advantages and disadvantages of universal banking system.

Ans: Universal banking is a system in which banks provide a wide variety of comprehensive financial services, including those tailored to retail, commercial, and investment services. Universal banking is common in some European countries, including Switzerland.Universal banking is a term for banks that offer a variety of comprehensive financial services, including both commercial banking and investment banking services.

Universal banks may offer credit, loans, deposits, asset management, investment advisory, payment processing, securities transactions, underwriting, and financial analysis. While a universal banking system allows banks to offer a multitude of services, it does not require them to do so. Banks in a universal system may still choose to specialize in a subset of banking services. Universal banking combines the services of a commercial bank and an investment bank, providing all services from within one entity.

Following are the advantages and disadvantages of universal banking system:

(a) Investor’s trust: Universal Banks hold status (equity shares) of many companies these companies can easily get other investors to invest in their business. This is because other investors have full confidence and faith in the universal banks. They know that universal banks will closely watch all the activities of the companies in which they hold a stake.

(b) Economies of the scale: Universal Bank results in economics efficiency that is, it results in lower costs, higher output and better products and services. In India R.B.I. is in favour of universal Banks because it results in economies of scale.

(c) Resource Utilization: Universal Banks use their clients resources as per the clients ability has a high risk taking capacity then the universal banks will advise him to make risky investments and not safe investments. Total universal banks invest their clients money in different types of mutual funds and also directly into the share market. They also do equity research, So they can also manage their clients portfolio’s profitability.

(d) Profitable diversification: Universal Banks diversity there activities. So, they can use the same financial experts to provide different financial services. This saves cost for the universal banks. Even the day to day expenses will be saved because all financial services are provided under one roof i.e. in the same office.

(e) Easy Marketing: The universal banks can easily market (Sell) all their financial products and services through their many branches. They can ask their existing clients to buy their other products and services. This requires less marketing efforts because of their well established brand names.

(f) One stop shopping: Universal banks offer all financial products ad services under one roof. One stop shopping saves a lot of time and transactions costs. It also increases the speed of how of work. So, one stop shopping gives benefits to both banks and their clients.

Beside the several advantages. The universal banks suffer from the following disadvantages which are as follows:

Disadvantages:

(a) Different Rules and Regulations: Universal banks offers all financial products and services under one roof. However all these products and services have to follow different rules and regulations this creates many problems.

(b) Effect of failure on Banking system: Universal banking done by very large banks. If these huge banks fails, then it will have a very big and bad effect on the banking system and the confidence of the public.

(c) Monopoly: Universal Banks are very large. So, they can easily get monopoly, power in the market. This will have many harmful effects on the other banks, the public and also harmful to economic development of the country.

(d) Conflict of Interest: Combining commercial and investment banking can result in conflict of interest. Some banks may give more importance to one type of banking and give less importance to other types of bank which is not a good sing for both the banks.

13. Define pure banking? Explain Pure banking system with some of its advantage and disadvantages.

Ans: Under pure Banking, the commercial banks give only short-term loans to industry, trade, and commerce. Pure Banking specializes in search advertised and contingent assignment for the front office of investment banking. Pure banking has established a strong market position recruiting for niche and highly complex structured products, derivatives and structured finance led areas within the leading investment and universal banks.

Pure banking has established the following credentials:

Strong, loyal and successful relationship with MDs in the premier investment and universal banks; this has be coupled with goods working relationship with human resources.

At present, pure banking has a strong market position as it has become successful for utilizing the banking resources to a great extent. Pure banking helps for the development of industries by help of investment banking because as financiers, the investment banking provide long term funds to business and industry, and also undertake the responsibility of selling shares and debentures of the corporation to the general public for commission. So, pure banking has built up a steady and continuous business base through investment banking.

Because of the above mentioned functions, pure banking has become successful in the present competitive market.

Following are the important advantages of pure banking which are mentioned below:

(a) Pure banking has stratified all the credit requirements.

(b) Pure Banking has successfully utilized the banking resources for the development of industries.

(c) Industries can mobilize greater finance resources through these banks.

(d) Pure Banking guides the general public regarding investment and other related matters.

(e) The bank provides expert guidance and advice to industries from time to time.

(f) The bank also maintains direct relationship with industries for the further development of the projects.

(g) Pure Banking also promotes rapid industrial development through investment banking.

Despite of having all these advantages, pure-banking suffers some major disadvantages which are mentioned below:

Disadvantages:

(a) There is the threat to stability of banks. The stability of the bank may be affected if the prices of securities in which banks have invested depreciate.

(b) Liquidity of banks may be affected, it the securities are not traded in the market.

(c) There is the every possibility of engaging in speculative business.

(d) Another limitation is that, there is the scope for over lending.

Though the system of pure banking is conductive to the maintenance of liquidity in bank’s resources, yet it cannot be considered a desirable system because it makes no provision to meet the long term requirements of industries. If the commercial banks do not make long-term loans to industries, the industrial development of the economy is bound to suffer a serious set-back. Thus, from the point of view of industrial development, the system of pure banking is neither desirable nor helpful.

However, after second world war, many underdeveloped countries show much interest on this banking system. In recent years also, there has been a favorable tread towards Pure banking because of increase in the volume of deposits and increase in the time deposits etc.

14. What are the opportunity and Prospect of wholesale banking in India? Briefly point out the fundamental tends for Wholesale Banking.

Ans: The enhanced role of the banking sector in the Indian economy, the increasing levels of deregulation alone with the increasing levels of competition have facilitated globalization of the Indian banking system and Placed numerous demands on banks. Operating in this demanding environment has exposed banks to various challenges.

The last decades has witnessed major change in the financial sector, new banks, new financial institutions, new instruments, new windows and new opportunities.

Corporate Banking (Lending as well as fee business accounts for about 85 percent of the wholesale banking and expected to grow by 19 percent annually. Investment Banking activities are likely to increase by 27 percent annually. Income from project finance is expected to grow buy 25 percent. Equities are expected to account for 70 percent of total revenue)

Following are some fundamental trends for wholesale Banking:

(i) Change in consumer behavior: corporate choose their bank on the basis of best bank for each product, competitive price and best services, when it comes to the higher ROE the income business, the sophisticated business, corporate are still fragmenting their wallets and going to the most specialized banks and it is a challenge that banks have to figure out, to ensure that not only they get the entire share of the credit business but also good share of the fee based income.

(ii) Emergence of the mid-corporate segment made corporate sophistication of product usage has gone up significantly and it is truly a segment of its own. It is a big contribution to revenue pools and it is growing quite strongly. While their product sophistication has gone up their usage of banks has also gone up and they are now exhibiting more and large corporate like behavior in terms of who they banks with.

15. Write note on Relationship Banking and mention its advantages and limitations.

Ans: Relationship banking involves offering customers a broad array of financial products and services that go beyond simple checking and savings accounts.

In addition to the base products, Relationship banking products may include the following: 

(i) Certificate of deposit.

(ii) Safe deposit banks.

(iii) Loans and business services (e.g., credit card processing). 

They may also include specialize financial products designed for specific demographics, such as students seniors of the wealthy.

So, it is clear to us, that the banks use a strategy to enhance their Profitability. They accomplish this by cross-selling products and services to strengthen their relationship with customers and increase customers loyalty.

Customers may be able to take advantage of banks desire to develop relationship banking to obtain more favourable terms or treatment with regard to some banking products as well as to obtain a higher level of customer service.

However, Federal anti-typing Laws established by the banks. Holding company act amendments of 1970 Prevent banks from making the provision of one product or services contingent on another.

To understand very clearly, relationship banking can be defined as a strategy used by banks to enhance their profitability. They accomplish this by cross-selling financial products and services to strengthen their relationship with customers and increase customers loyalty.

This system has some advantage from the customers point of view, that it tries to provide a better and higher level of customer service.

This system also tries to maintain a strong relationship with its customers. The customers have to follow a simple procedure to transact with the bank.

Another benefit of this system is that it prepares specialized financial products for different age groups.

The customers have greater faith upon this banking system because of the quick and efficient services provided by it.

Though this system has gained several advantages, it has also suffered from some limitations.

Firstly, the financial products of this banking is highly expensive, so, if the bank is unable to capture a strong market then there is the possibility of bank failure.

Secondly, the Federal anti-typing laws have impoşe upon the bank to control its functions and services.

As the products of the bank is very costly there is the lesser chance of good market positions. So to get rid of it the bank may be engaged in some speculative activities to get a higher margin of profit, which may not be a healthy sign for the bank.

16. What is the position of mixed banking in India? What are the developments/Advantages and disadvantages of Mixed banking?

Ans: Though the mixed banking system was introduced in Germany in the beginning of 20th century, it lost its popularity in German after the world war (1914-19). It was felt that the two systems. Viz deposit banking and investment banking should be kept separate from each other due to completely different nature of risks.

In India too, these two system of banking are being kept separate commercial banks in general provide only short-term loans due to the following reasons.

(i) They have low capital base.

(ii) Their deposits are basically short-term.

(iii) They lack technical expertise required for appraisal of term loan proposals.

The Reserve Bank of India is encouraging commercial banks to slowly enter the term – loan lending in view of the fact that it may boost up their profits.

Effective from August 19, 1993, a commercial bank could extend term loan upto Rs. 50 crores for each project However, a loan exceeding Rs. 50 crores was to be financed under a consortium agreement. However, according to announcement made by Reserve Bank of India in April 1997, the forming of consortium by banks would not be obligatory even if the credit limit to the borrowers exceeded Rs. 50 crores was to be financed under a consortium agreement. However, according to announcement made by Reserve Bank of India in April 1997, The forming of consortium by banks would not be obligatory even if the credit limit to the borrower exceeded Rs. 50 crores.

The development of mixed banking in Germany has been due to several historical reasons. The scarcity of capital and absence of suitable entrepreneurs in Germany led the commercial banks to collaborate closely with industries in the interest of country rapid industrial development. Due to the shortage of capital which might be due to the absence of mobilisation of savings, industries in Germany become independent upon the commercial banks for the supply of necessary capital funds. Consequently, commercial banks participated in a big way in providing capital to industries both by granting long-term loans and by floating debentures of the joint-stock companies.

There are some advantages of mixed banking which are as follows:

(i) Firstly, it enables the banks to become active partners in the important task of country’s economic development.

(ii) This system helps to promotes and develop the industries in the country.

(iii) Banks can help the industries by either undertaking their equity and debenture issues or by granting them advances in anticipation of such issues in future.

(iv) Banks can also provide the industries Sound financial advice about the outlook in the investment market.

(v) Further more, where the banks command large liquid resources would be in the interest of these banks to invest in the long-term industrial securities and earn higher interest income.

Despite of several advantages, the mixed banking suffer from the following limitation which are mentioned below:

(i) Firstly the disadvantages of mixed banking system come to surface in times of depression when industrial losses become Usual.

(ii) A large part of capital resources of a mixed bank becomes locked up in the long-tern financing of industries, consequently, industrial losses result in the failure or banks.

(iii) During depression, the price of share and other industrial securities depreciate. Consequently, a considerable portion of commercial banks assets portfolio disappears through the loss of value.

(iv) During the great depression of thirties many banks failed and the U.S.A, France, Germany, Japan and other countries had to face this depressionary situation and ultimately banks had to close their doors for a long time.

(v) The activities of the American banks in stock and real estate market and the participation of the Indian banks and the Austrian credit-Anstait in recklessly financing the industries clearly demonstrate the evils of the mixed banking system.

But, After the second world war, underdeveloped countries began to show much interest on mixed banking.

In recent years, there has been a favorable trend towards mixed banking in India, because of the following reasons:

(a) Firstly, there is the increase in the volume of deposits.

(b) deposits. Secondly there is the interest in the time deposits than demand deposits.

(c) Reserve bank of India’s initiative to strengthen the banking system. 

(d) After nationalization, The government encouraged the public sector banks to grant long-term loans to small-scale industries and entrepreneurs. It is made on the grounds of rapid industrialisation in the country.

(e) A realisation that overall growth depends upon development of capital market also.

17. What should be the aims of Regional Bank?What are the advantages and disadvantages of Regional banking?

Ans: As a regional banking institution, the bank should be a stable and vital part of the community. Its aim should not only to do business and earn profit in that Particular region.

As the people know that today life is sometimes complicated, but, banking matter should be so complicated, it should be easier for the people of the respective regions.

The Regional Banker should provide sound advice to the regional people for their greater benefit.

There is no such thing as a one-size-fits-all banking solution. That’s why regional banks should work with their customers to find the right. Answers for their individuals needs.

If the regional banks are able to fulfill the aims, the definitely there is the possibility of getting goods response from the different people of different regions.

Here are five regional bank benefits:

(i) Branch and ATM access: Regional banks generally operate a sizeable network of branches, many inherited through bank acquisitions, so one is never far away. Further, in addition to their branch ATMs, regional banks typically align with other ATM networks to assure the same access one would find with a national bank. A regional bank usually has in-network ATMs available even if you’re traveling outside of the U.S.

(ii) Technology: Regional banks understand your need to be on the go. They not only use their financial resources and talent to develop advanced tech banking services; their size affords them the agility to roll out quickly. From mobile deposits to digital person-to-person transfers, most services conducted in a branch should be easily doable through a mobile app or on a laptop.

(iii) Rates and fees: Regional banks, because of their flexibility, usually can give their clients highly competitive rates. Across key products – savings, money markets accounts, and CDs – regional banks can even outperform small banks. And because they compete with both large banks and community lenders, their fees will likely be equally competitive.

(iv) Breadth of financial services and products: Regional banks, due to their size range, will likely manage a suite of investment products and services as comprehensive as those at their national competitors. Yet they can deliver them with more personalized attention. Chances are, you’ll find all your needs met through all stages of life, from high school savings to retirement planning.

(v) Community involvement: Their unique combination of size and localized roots allows regional banks to play a natural, substantial role in supporting the communities they serve. For example, they may invest in the region’s charities, schools, and emerging communities, and it’s not uncommon to see regional bankers roll their sleeves up and volunteer in their neighborhoods.

But it’s not just contributions of funds and time-some regional banks are additionally involved in their communities through in-house financial literacy and wellness programs. These programs help their clients make better informed life decisions for a better overall community.

Disadvantages are:

(i) Haste and Lack of Coordination in Branch Expansion: Haste in branch expansion programme in many cases has resulted in lopsidedness due to lack of coordination. In several cases, it could not be ensured that the branches of the RRBs are opened at centres where no commercial or co-operative banking facilities were provided.

(ii) Difficulties in Deposit Mobilisation: The RRBs encountered a number of practical difficulties in deposit mobilisation. On account of their restrictive lending policy which excludes richer sections of the village society, these potential depositors show least interest in depositing their money with these banks.

(iii) Constraints in Deposit Mobilisation: The RRBs exclude the richer sections of the village society in providing direct financial assistance. These sections have potential savings to deposit. But, they are least interested in depositing them with the RRBs in view of the restrictive credit policy of these banks. Further, state and local governments and their agencies also have not co-operated much by maintaining their deposit accounts with the RRBs. In short, the RRBs have failed to mobilise accounts within themselves.

(iv) Slow Progress in Lending Activity: The RRBs’ pace of growth in loan business is slow. For this the following reasons may be given:

(i) There have been limited scope for direct lending by RRBs in their fields of operations.

(ii) It is always difficult to identify the potential small borrowers and the bank staff have been required to make special and sincere efforts in this regard.

(iii) Most of the small borrowers do not like the bank formalities and prefer to borrow from the informal/indigenous sources of finance, such as money-lenders.

(iv) The anomalies in the Differential Interest Rate (DIR) Scheme also posed a special problem to the RRBs. While the RRBs charge 14 per cent interest, the commercial – banks charge only 4 per cent under the DIR Scheme in rural areas.

(v) Urban-Orientation of Staff: A crucial practical difficulty experienced in their working by the RRBs is the urban orientation of their staff which is rarely inclined to serve in rural areas. There is no true local involvement of the bank staff in the village where they serve.

(vi) Procedural Rigidities: The RRBs follow the procedures of the scheduled commercial banks in the matter of deposits and advancing loans which are highly complicated and time-consuming from the villagers’ point of view. The rural borrowers always appreciate informal ways and simple procedures as have been followed by the money-lenders and the indigenous bankers.

18. Explain in details about the wholesale banking. What are the advantages and demerits of wholesale banking. 

Ans: Wholesale banking is commonly defined as banking services that are provided between merchant banks and other types of financial institutions. The term is often used, however, to refer to the wide range of financial service that are provided by financial institution to various corporations and business as well as to government entities.

Usually, however, wholesale banking also includes banking service offered to corporations and other large institutions, financial or otherwise.

In this sense wholesale banking comprises the following:

(a) cash management services. 

(b) foreign exchange.

(c) business to business payment.

(d) trust service.

(e) custodial services. and

(f) commercial lending and trade finance etc.

Wholesale banking compares with Retail banking which is the Provision of banking service to individuals, Large financial institutions, such as, citigroup, commonly engage in both Wholesale Banking and Retail Banking.

Wholesale banking in US has traditionally excluded investment banking services. Such as, stock offerings. However, the unraveling of Glass Steagall restrictions and the consequent mergers of commercial and investment banks, have made the line between wholesale banking and investment banking less finely drawn.

In other words, wholesale banking is that banking service which in contrast to retail banking are offered to government agencies, pension funds, other institutional customers and to corporations with strong balance sheets and sound income statement. These service include cash management, feel and equipment leasing, large-sum loans, loans participation merchant banking and trust services etc.

Modern wholesale banks are engaged in finance, wholesaling underwriting, market marking, consultancy, mergers and acquisition fund management, counseling on international business, international guarantees, insurance, demonstration etc. Should from the part of syndication activity for achieving the wholesale banking.

The wholesale banking is also marketed by element of efficiency in terms of time and delivery which is required in a competitive environment. To a bank it means business both on the demand side and the supply side of the wholesale client. For instance, the banker can step into Banking for the Suppliers to the corporate and the same time provides service to the receivers of the Products of the corporate.

Following are the advantages, status/demerits of wholesale banking:

(i) Large income accrual as the volume of each transaction is relatively bigger compared to retail banking.

(ii) Provides opportunities to Cross sell a bouquet of banking products to meet the various requirements of corporate.

(iii) Scope of large exchange income from forex transaction involving export import business of client and fee based income from services like cash management, advisory services etc.

Let us have a look of the present status of wholesale banking Firstly, most banks have a presence in wholesale banking. But this vertical is largely dominated by large Indian banks. while a large portion of the business of foreign banks comes from wholesale banking, their market share is still smaller than that of the large Indian banks. A number of large private players among Indian banks are also very active in this segment. Among the players with largest foot print in the wholesale banking space are, SBI, ICICI Bank, IDBI Bank Bank of Baroda, Canara Bank, Bank of India, Punjab National Bank and Central Bank of India.