Indian Banking System Unit 3 Social Control Over Banks

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Indian Banking System Unit 3 Social Control Over Banks

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Social Control Over Banks

INDIAN BANKING SYSTEM

A. Multiple choice question and answers:

1. Which of these banks was nationalized in 1969? 

(a) United Bank Of India.

(b) Vijaya Bank .

(c) Andra Bank.

(d) Punjab and Sind Bank.

Ans: (a) United Bank Of India.

2. Which nationalised bank was merged with Punjab National bank in 1993?

(a) Punjab and Sind Bank.

(b) Ludhiana Area Bank.

(c) Majha United Bank.

(d) New Bank of India.

Ans: (a) Punjab and Sind Bank.

3. Who was the Prime Minister of India when Banking Nationalization was done in 1969?

(a) Jawaharlal Nehru.

(b) Indira Gandhi.

(c) Rajiv Gandhi.

(d) Narsimha Rao.

Ans: (a) Jawaharlal Nehru.

4. When was the State Bank of India nationalized? 

(a) 1955

(b) 1956 

(c) 1959

(d) 1964 

Ans: (a) 1955

5. Which of these banks was not associated with the State Bank of India in 1959?

(a) State Bank of Hyderabad.

(b) State Bank of India.

(c) State Bank of Mysore.

(d) State Bank of Patna.

Ans: (a) State Bank of Hyderabad.

6. Which is the first commercial bank incorporated by the Indians in 1881?

(a) Imperial Bank Of India.

(b) Awadh Commercial Bank.

(c) Reserve Bank Of India.

(d) State Bank Of India.

Ans: (b) Awadh Commercial Bank.

7. The most widely used tool of monetary policy is known as? 

(a) Open market operations.

(b) Discount rate.

(c) Issuing of notes.

(d) None of these.

Ans: (a) Open market operations.

8. NBFC stands for―

(a) New banking finance company.

(b) New business finance and credit.

(c) National banking and Finance Corporation.

(d) Non banking financial company.

Ans: (d) Non banking financial company.

9. Which is the primary activity of a commercial bank? 

(a) Maintaining deposit accounts including current accounts.

(b) Issue and pay cheques.

(c) Collect cheques for the bank’s customers.

(d) All of these.

Ans: (d) All of these.

10. Banking sector falls under which of the following sectors? 

(a) Industrial sector.

(b) Service sector.

(c) Manufacturing sector.

(d) None of these.

Ans: (b) Service sector.

11. Which of these is not a part of Capital Structure? 

(a) Equity Shares.

(b) Debentures.

(c) Short-term borrowings.

(d) Bonds.

Ans: (c) Short-term borrowings.

12. Capital Structure refers to which of the following options: 

(a) Current assets and current liabilities.

(b) Shareholders equity.

(c) Long term debt, preferred stock and common stock options.

(d) None of the above.

Ans: (c) Long term debt, preferred stock and common stock options.

13. The main aim of capital structure is to: 

(a) Maximize owner’s return and minimize the cost of capital.

(b) Maximize owner’s return and maximize the cost of capital.

(c) Minimize owner’s return and minimize the cost of capital.

(d) Minimize owner’s return and maximize the cost of capital.

Ans: (a) Maximize owner’s return and minimize the cost of capital.

14. The process of financing the assets of a business is known as:

(a) Asset Structure.

(b) Owners Structure.

(c) Financial Structure.

(d) Capital Structure.

Ans: (c) Financial Structure.

15. Capital Structure is an optimal mix of which one of the following options:

(a) Sales and profits.

(b) Debt and equity.

(c) Current assets and fixed assets.

(d) None of the above.

Ans: (b) Debt and equity.

B. Fill in the blanks:

1. ___________ is the corporate office of RBL Bank located.

Ans: Mumbai.

2. ___________ banks is the largest commercial bank in India. 

Ans: State Bank of India.

3. ___________ is not the fund based business of commercial banks. 

Ans: Issuance of Letters of Credit.

4. ___________ is not a private sector bank.

Ans: Bank of India.

5. Recurring Deposits is a type of ___________ deposits.

Ans: Time.

6. External drains leave ___________ impact on commercial bank.

Ans: Lowers the reserves of bank.

7. ___________ is the primary function of a commercial bank.

Ans: Accepting deposit.

8. Credit can be created by ___________.

Ans: Commercial banks.

9. Rate of interest is increased by RBI at times of ___________. 

Ans: Lower inflation.

10. ___________ is not a function of the RBI.

Ans: Issuance of coins.

11. Capital structure ___________ financial structure.

Ans: is a part of.

12. To get a broad idea of the risk profile of a business, one should look at their ___________.

Ans: capital structure.

13. Capital Structure is a part of ___________.

Ans: The liability side of a balance sheet.

14. ___________ and ___________ are two financial instruments that carry a fixed rate of interest and they have to be paid off regardless of whether the firm earns revenue or not. 

Ans: Bonds, Debentures.

15. The claims by preferred shareholders on a firm’s assets and income come ___________ those of ordinary shareholders and ___________ those of creditors. 

Ans: Before; after.

C. Answer the following:

1. In which year the National Credit Council (NCC) was set up?

Ans: The National Credit Council was set up by the Government in 1968.

2. In which year the scheme of social control initiated by the Government?

Ans: The scheme of social control initiated by the Government in 1967.

3. How many banks were nationalized in the year 1969?

Ans: 14 motor commercial banks were nationalized in the year 1969.

4. How many private sector banks were there in December 1969?

Ans: There were 67 private sector banks in December 1969.

5. Which banker deals in Hundi? 

Ans: Indigenous banker deal in Hindi.

6. How many commercial banks were nationalised in the year 1980?

Ans: 6 commercial banks were nationalized in the year 1980.

1. Mention the provision of the Banking Regulation Act deals with the subject of social control.

Ans: The Preamble of the Amending Act 58 of 1968 reads as: “An Act further to amend the Banking Regulation Act 1949, so as to provide for the extension of social control over banks and for matters connected therewith or incidental thereto and also further to amend the Reserve Bank of India Act, 1934, and the State Bank of India Act, 1955.”

2. What were the criticism made by different experts regarding nationalization of banks. 

Ans: Several eminent persons criticized the measure for nationalization. They argued that the day of imposition of ‘Social Control’ for nationalization was too short a period to judge the results of ‘Social Control’ and there was no reason to conclude that it had failed. The opponents also said that there was no such pressing need as made out by Government. The timing of the step was determined by political struggle and it was the result of inter-party struggle for power. They said that a switch over to the public sector is not the only remedy for the evils revealed in the private sector. The internal control of the Government is accompanied by equal or perhaps more harmful evils; public sector institutions are known for their lack of dynamism.

The opponents argued that, in foreign countries, banking company is not nationalised. Commercial banks in Denmark, Norway, Sweden, Finland are in the private hands.

The opponents also said that, there is the corruption and favouritism in the public sector as the door is always opened to do so. Moreover, there is the possibility of heavy losses in the public sector. The common man has a justifiable belief that public sector undertakings do not respect an individual and delays and lethargy in work and service are a bane of such undertakings.

There was the complains that the balance sheet of the bank does not reveal the actual state of affairs. Window dressing and manipulation are done at random. This tendency has particularly increased after nationalisation of commercial banks.

The opponent suggested that, there should be the separate agency. Such as, the Banking Authority of India and a Separate Audit organisation should be constituted to carry out regular inspection of banks to detect and prevent fraud, malpractices etc.

3. Give a brief review of nationalization of banks.

Ans: The role of banks has undergone a revolutionary change after nationalisation. During the period upto end of January 1972, banks have opened number of offices. A greater number of population is being served with banking facilities. There has been a massive growth in banking facilities both in the rural and urban areas.

The bankers have realised that they have to try hard for the welfare and prosperity of the society. Their aim was to attain social objectives viz adequate economic growth, wider diffusion of economic power and channelising of available resources with due regard to the requirements of the priority sectors etc.

The number of bank offices in the rural areas in constantly increasing. The share of rural offices in total commercial bank offices increased from 22.3%. 1969 to 51.9% in 1997.

The aggregate deposits of all scheduled commercial banks increased from 4646 crores in June 1969 to 5,05,599 crores in March 1997.

The aggregate credit of scheduled commercial banks increased from 3,599 crores in June 1969 to 2,78,401 crores in March 1997.

Banks have engaged in area development work which has brought the banks and rural borrowers more close to each other. Beside lending finance banks also provide services, technical or otherwise, which are urgent for the success of the project.

At present banks give more emphasis on desirability of the purpose and economic viability of the project at the time of offering loans.

After nationalization, banks have shifted from traditional banking to innovative banking. This has become possible due to realisation by the banking system that banks like other institutions live and grow with the community and hence they have to work hard for the welfare of the community and combine their business goals with social obligations.

The banks have also developed and implemented a number of innovative schemes for reorienting the distribution of credit to cover even the poorest among the poor and other adversely placed persons of the community like, physically handicapped, tribals, harijans, prisoners, orphans and other poor people like cobblers, road side hawkers, landless labourers etc.

The basic aim of nationalisation of bank was to give priority in credit to some of the important sectors like agriculture, small-scale industries, road and water transport operators, retail trade, small business, professional and self-employed persons, weaker sections of the society, such as, small and marginal farmers, scheduled castes, scheduled tribes etc.

4. What were the Benefits of Nationalization of Banks? 

Ans: Nationalization of banks has helped the government end the private monopoly over the banking sector.

Some of the main benefits of nationalization of commercial banks are as follows:

(i) It is argued that the nationalization of the banks has lead to the abolition of power from the hands of a few monopolists. This has enabled the government to work towards the welfare of people and economic prosperity.

(ii) With the nationalisation, the government has control over a large amount of funds. Now it can work towards modernisations of industry, transport, public services and the welfare of the nation.

(iii) The nationalization of the banks implemented public faith in the banking system. With a stable banking system, the banks can earn large revenue and make maximum utilization of resources as well as fund all types of industries and sector.

(iv) The bank branches, were no longer confined to. urban centres. It expended to unbanked areas like villages and remote areas thus reducing the regional imbalance. This encouraged a large population to nurture banking habits. Consequently, it helped bring about rapid change financial services offered by the banks and strengthen the economy.

(v) India’s adoption of socialist measures allowed the government to promote green revolution and assist in the growth of the agriculture, small industries and export, to encourage new entrepreneurs and to develop all backward areas.

5. What are the disadvantages of Nationalization? Explain. 

Ans: Disadvantages of Nationalization:

(a) Low productivity and inefficiency: Due to the fact that government businesses are usually poorly managed, most nationalized businesses by the government end up being mismanagement and that reduces efficiency of the business.

(b) Prevention of private initiatives: When government takes over private business, there is every likelihood that private initiatives will also decrease. This can also be due to lack of competition.

(c) Consumers can be exploited: Even though nationalization is supposed to be with the aim of not making profit, that does not mean that the government can not exploit the citizens. In many cases, even after nationalization, citizens are still exploited by the government.

(d) Corruption and mismanagement: As usual, there is always a high rate of corruption in businesses owned and managed by the government. Thus, nationalization may not be a good idea for a nation where majority of politicians are corrupt by nature.

(e) Political interference: When a business becomes owned and managed by the government, there is usually political interference and that may lead to misallocation of resources.

6. What is Private Sector Bank?

Ans: Private sector banks are those banks, where private individuals or private companies own a major part of the bank’s equity. Even though these banks follow the nation’s central bank’s guidelines, but they can formulate their independent financial strategy for the customers. A large part of these banks are traded on the stock market and anyone can buy a significant part of these bank’s shares from the stock market.

Most private sector banks are very agile in their financial strategy. These privates can make a quick financial decision according to the market condition. For this reason, interest rates fluctuate quickly on both deposits and loans. They offer very reliable services to the customers. They also offer various customized services to the customer to fulfill their individual financial needs. There is no job security in private banks. Most employees work very hard to satisfy the customer’s financial requirements. In these banks, the employees get promotions on their merit and performance.

However, private sector banks charge a little extra for their financial services. Compared to other banks, the interest rate on deposits is low in most private sector banks. Even though getting a loan in the private banks is very easy, but they charge more interest on these loans. Axis Bank is one of the best examples of private sector banks in India. This bank is very competitive and offers the best services to its customers.

7. Why Were the Private Banks Nationalized?

Ans: Prior to the nationalization, private banks were controlled and managed by private owners. The government decided to end the private monopoly through the nationalization of banks and bring these financial institutions under government control.

The decision of nationalisation was purely taken in national interest. It was a step necessary to benefit the Indian economy and its people. Private banks were class-based and were benefitting only a small group of people. This leads to the concentration of power in hands of few people and if the necessary steps were not taken the economic disparity would become more prominent.

With the nationalization of the banks, the credit scenario in the country changed. Now the government can extend affordable credit to all types of borrowers. The banking business would contribute to economic development. The disparity between the rural and urban areas can be reduced by exposing people to better banking facilities. The nationalized banks would help the government to finance the growing financial requirements of the country.

8. Write a brief note on Indigenous Bank/Bankers.

Ans: Banks which is run by individuals firms dealing in hundies and sometimes accept deposits is known as indigenous bank. The indigenous bankers constitute the ancient banking system in India.

The main functions of the indigenous bankers is accepting deposits from the public. The deposits are of two types, i.e. the deposits repayable on demand and deposits répayable. after a fixed period. Indigenous bankers also advance loans to their customers against all types of securities.

Indigenous bankers suffers from serióus limitations. So, the Reserve Bank of India has been making efforts to bring the indigenous bankers under its control, and for that purpose, the Reserve Bank of India has imposed certain conditions. Such as, they should have a minimum capital of Rs..1 lakh, which should be increased to Rs. 6 lakhs within five years. They have to restrict themselves only to the banking activities and should put an end of the non-banking business etc. The Reserve Bank has the right to regulate the banking business of these bankers. The scheme was not put into practice, because the indigenous bankers did not agree to accept its various conditions.

9. What is a commercial bank?

Ans: Commercial banks are those banks which provide both short-term and long-term credit. Their customers come from all walks of life from a small business to a multinational corporation having its business activities all around the world. The banks have to satisfy the requirements of different customers in modern times. So, different types of banks have come forward to suit specific requirement of different types of customers.

10. Write a note on The Investment Policy of the Commercial Bank.

Ans: Investments in banks are meant for earning profits. They take the help of the reserves both primary and secondary to meet the liquidity requirements of the bank. This also helps in meeting the credit needs of society. These needs include short term loans that are provided by the bank. After providing the loan, the bank invests the remaining for a long period to grow and maximize the earning capacity. All banks have a certain investment policy that goes by the principles of a commercial bank. These investment policies include high returns of unloaded resources. All of this activity is conducted keeping in mind the principles of lending where often the aim of earning profits clashes with principles of liquidity and safety. Thus, to avoid such risk, it is essential to implement policies that can create a balance between the two principles. Balance in such scenarios refers to maintaining the balance between liquidity and safety and maximizing them in a manner that can produce a generous amount of profit for the bank.

11. Why should a Bank follow the Principles of Sound Lending? 

Ans: One of the primary functions of the bank is lending. The deposits that are collected by the bank from its customers are used as loans for the customers who require it. However, a bank cannot function if it provides a loan to the customer without any form of profit-earning objective or for that matter if it does not follow the basic principles of banking. Further, the bank also might face risks if they do not apply sound lending principles. The interest that the bank received from the customers while repaying the loan, is the most important source of income for the bank. Safety, liquidity, purpose, profitability are some of the principles that must be followed to mitigate risks like loss and fraudulence.

12. What is the most important function of a Bank? 

Ans: The most important function of a bank is to collect deposits from the public and lend those deposits for the development of business, agriculture, trade and commerce.

13. What is the first commercial bank of India?

Ans: Bank of Calcutta is the oldest commercial bank in India. It was established in the year 1806. It was later renamed the Bank of Bengal. Currently it is known as State Bank of India.

14. What is the main purpose of commercial banks? 

Ans: The main purpose of commercial banks is to provide financial services to the general public and also provide loan facilities to the business which helps in ensuring economic stability and growth of the economy. Therefore, we can say that credit creation is the most important purpose of commercial banks.

15. Briefly mention the views of the National Credit Council regarding the allocation of credit.

Ans: The National Credit Council identified large tracts of the country which were outside the organised monetary sector, where the use of currency still persisted in a large measure. The urban orientation of commercial banks and the weaknesses of the co-operative system and non-availability of institutional credit to weaker sections of the community had created serious imbalances. Even in the developed regions, large undeveloped and under-developed pockets existed. Regional imbalances were a major cause of lack of growth.

Further the commercial banking sector had operated in the recent past in such a manner that resources from the rural areas and the undeveloped areas were funneled to the major towns and cities. Thus, the fruits of development were, in a large measure, being denied to large tracts of the country and to large segments of the population.

16. What were the finding of the National Credit Council regarding the banks credit in the country?

Ans: The findings of the National Credit Council were that an overwhelming proportion of commercial bank’s credit was going to large scale industries, wholesale trade and commerce and that even within these sectors credit was not widely and evenly distributed. There were large disparities in this respect between different states and regions of the country. Furthermore, other weaker sections of the community and small borrowers were virtually denied institutional credit. There was a lack of contact between small borrowers and institutional credit agencies and due to the uneven spread of banks’ offices, there were delays in sanctioning advances and completing the formalities in respect of documentation. Even banking hours were unsuited to the needs of small borrowers. Small loans called for more supervision and entailed higher costs.

After nationalisation, commercial banks were required to observe the priorities as enunciated in the plans and channel resources to the various sectors accordingly. Thus, not only the requirements of large-scale industry and of trade and commerce were to be met but those of ‘priority sectors’ were also to be given immediate and due attention in respect of both short-term and medium-term credits.

In terms of absolute quantity the total funds loaned by the banking system have gone on increasing with periods of scarcity and plenty, depending partly on the results of the resources mobilisation activities of the banks themselves. The sectional allocation of credit has also changed. As at the end of December 1975, the priority sectors accounted for a percentage varying between 30-35 of banks credit as against almost a negligible level at the start.

17. Write the functions and services of Indian Banks? 

Ans: The banking commissions report has enlisted the following services rendered by Indian commercial banks.

(a) Allied Deposit Schemes:

(i) Current accounts.

(ii) Savings accounts.

(iii) Fixed or term deposits.

(iv) Monthly interest income deposit schemes.

(v) Cash certificates.

(vi) Annuity or retirement scheme.

(vii) Farmer’s deposit schemes.

(viii) Daily savings schemes.

(ix) Minor savings schemes.

(x) Marriage/Educational savings plans.

(b) Deposits Limited With Special Benefits:

(i) Insurance linked savings bank accounts.

(ii) Housing deposit schemes.

(iii) Salary reserve scheme.

(c) Services Provided for Depositors:

(i) Collection of cheques, demand drafts, bills of exchange, promissory notes, hundies, inland and foreign documentary and clean bills.

(ii) Purchase of local and foreign currency documentary/clean bills, negotiation of bills under inland and foreign letters of credit estimated by branches and correspondents.

(iii) Carrying outstanding introduction of depositors for payment of insurance premium, payment of subscriptions, payment of certain taxes and gift remittances.

(d) Allied Loan Schemes:

(i) Call loans.

(ii) Term loans.

(iii) Cash.

(d) credit.

(iv) Overdrafts.

(v) Letters of credit.

(vi) Personal loans for durable consumer goods, construction of residential houses, and electrification and purchase of gas connections.

(vii) Loan participation.

(viii) Loan to road transport operators.

(ix) Loans to small-scale industry.

(x) Loans to self-employed persons.

(xi) Loans to technocrats, technologists, technicians and entrepreneurs.

(xii) Loans to retail trade.

(xiii) Educational loans to graduates and postgraduates in India and for higher studies abroad. and 

(xiv) Assistance to industrial estates.

(e) Ancillary Services:

(i) Guarantees such as performance guarantees and financial guarantees.

(ii) Safe custody of deeds and securities.

(iii) Safe deposit vaults.

(iv) Purchase and sale of services.

(v) Collection of interest on securities/debentures and dividend on shares, collection of pension bills.

(vi) Remittance of funds, such as bank drafts, mail transfers, telegraphic transfers to other parts of the country and to foreign countries.

(vii) Executors and trustees which include executors and trustees under a will, trustee under a trust deed, trustee under a deed of settlement, trustee for life insurance policies under the Married Women’s t Property Act, 1974.

(viii) Personal tax assistance, preparing income tax sales tax/wealth tax returns.

(ix) Investment facilities, such as underwriting of new issues, guidance to investment, stock exchange assistance.

(x) Credit transfers.

(xi) Credit cards.

(xii) Travellers cheques.

(xiii) Gift cheques.

(xiv) Emergency Vouchers. and 

(xv) Sale of the Unit Trust National Savings Certificates etc.

18. What are the favorable points of Stock-Exchange securities? 

Ans: The following points are in favor of investing funds in the purchase of stock exchange securities:

(i) They act as a third line of defence as they can be realised in case the banker finds his cash reserve insufficient to meet the unexpected demand of his customers and money can be borrowed against them at reasonable rates.

(ii) They yield a steady and reasonable return on the capital investment.

(iii) Their presence in the balance sheet of a bank inspires and strengthens public confidence in the bank.

19. What precautions a banker should take while advancing money against documents title to goods? 

Ans: The following are the precautions a banker should take while advancing money against documents of title to goods: 

Customers Integrity and Experience: The honesty, reliability the experience of the customer are most essential. Unless the banker can and really upon his customer, he is unable to satisfy himself as to the genuineness of the documents of title to goods. The customer’s experience of the line. s necessary to avoid the sale of goods at a loss, or their deterioration.

Certificate of Packing: In order to ascertain the contents of the packages, the banker should ask for the certificate of a reliable packer, or depute a reasonable representative to supervise the packing the cost of supervision being borne by the borrower.

Copies of Bill of Lading: The banker should try to get all the copies of the bill of lading. The need for this will be understood when we know that the captain of a ship is under no obligation to inquire into the title of the holder of the bill of lading and will ordinarily give him the delivery of the goods, provided he does not know that another copy is pledged with the banker.

No onerous condition: The banker should see that there are no onerous clauses in a bill of lading and the charter party. Sometime a bill of lading may contain an onerous clause such as “and all other conditions as per charter party,” which may involve the payment of heavy charges incurred through no fault of the banker or his customer, therefore, before advancing money against them, the banker should carefully see what other conditions. are laid down in the bill of lading.

Insurance Policy: It is necessary that the banker should require the insurance policy in respect the goods. He should insist upon having the policy, and not the brokers note.

Trust Receipt: When the banker has to pare with the bill of lading or the goods, without receiving the amount due from the customer, it is essential that he should get a trust receipt signed by his customer, agreeing to hold the goods or their sale proceeds in trust for the banker, so long as the entire amount, due to the banker is not paid off. If a customer, who has singed such a trust receipt fails to hand over to the banker, the sale proceeds of the goods; the former will be liable for criminal breach of trust.

20. Write briefly about the investment advice by the bankers to their customers.

Ans: Normally, bankers do not take upon themselves responsibility of giving advice on investment. However, with their wide knowledge of the financial market conditions, they are in a position to advice the clients about the various investment avenues. Normally, customer investments are maintained by banks by holding securities, etc. in safe custody and by selling, buying or investing according to their written instructions.

When customers seek advice or investments in stocks and shares, it is usual either to supply the names of a few reliable stock and shares brokers without responsibility, from whom the customer may obtain the advice or obtain the advice from one or two reliable brokers and pass it on to the customer without responsibility.

21. What is the meaning of “Liquidity of Banks”?

Ans: Liquidity means the ability of the bank to give cash on demand. In the words of Sayers, “Liquidity is the word that the banker uses to describe the ability to satisfy demand for cash in exchange for deposits.” The business of the bank primarily depends upon the confidence on the depositors on the bank and the depositors feel confident when they are sure that they can demand their money back at any time. So, the bank must keep sufficient amount of liquid assets with them to meet the demand from the depositors. Liquid assets are assets either in the form of cash or in a form that can be easily turned into cash.

Cash in hand, money at call or short notice, bills of exchange and treasury bills etc. are the important liquid assets of the bank. So, to gain public confidence, every bank has to maintain sufficient liquidity in modern banking business.

22. What is Statutory Liquidity Ratio (SLR)?

Ans: Statutory Liquidity Ratio (SLR) is the govt. term for the reserve demand that commercial banks are required to maintain in the form of cash, gold reserves, Reserve Bank of India (RBI) approved securities before giving credit to the customers. It is directed under Section 24 of the Banking Regulation Act, 1949. The SLR is determined by the RBI. It is usually used to control inflation and fuel growth, by increasing and decreasing the money supply. It controls the credit growth in India. The maximum limit of SLR is 40% and the minimum limit of SLR is 0 In India, the RBI always decides the percentage of SLR. If the bank fails to control the required level of the statutory liquidity ratio, then it becomes responsible to pay penalty to Reserve Bank of India (RBI). The current SLR rate in India is 18.25%.

When the SLR is high, banks have less money for commercial operations and hence less money to lend out. When this happens, home loan interest rates often rise. When the SLR is low, similarly, home loan interest rates are likely to fall.

23. How to Calculate SLR?

Ans: SLR is calculated by a percentage of the total demand and time liabilities of banks. Time liabilities refer to liabilities which commercial banks are liable to pay to the customers after a certain period mutually agreed upon. Demand liabilities are deposits of the customers which are payable on demand at any time. An example of time liability is a six month fixed deposit which is not payable on demand but only after six . months. An example of demand liability is a deposit maintained in a savings account or current account that is payable on demand through a withdrawal form such as a cheque at any time.

Here, below, is the formula to use in calculating SLR. It may seem too simplistic, but it’s actually effective and that’s why you should learn it. SLR = % of Net Demand & Time Liabilities (NDTL). 

(i) What is the purpose of statutory liquidity ratio?

The purpose of the statutory liquidity ratio (SLR) is to allow the financial bodies in India to maintain liquidity. SLR also helps in maintaining the inflation and credit flow in the country.

(ii) What is the importance of SLR?

One of the biggest roles of SLR is to maintain the minimum rate also called the base rate at which the lenders in India can lend money to their customers. SLR plays a significant role in building transparency between the RBI and other banks in India. It is the RBI which decides on the SLR.

(iii) How does statutory liquidity ratio work?

Every bank in India must maintain a particular amount of Net Demand and Time Liabilities (NSTL) in the form of gold, cash, or other liquid assets. The ratio to the time liabilities and assets is called the statutory liquidity ratio.

24. What are the components of the Statutory Liquidity Ratio? 

Ans: There are three major components of SLR:

(i) Liquid Assets: These are assets one can easily convert into cash-gold, govt-approved securities, cash reserves, treasury bills, and government bonds.

(ii) Net Demand Liabilities: It is like your Current and Saving Bank accounts from which you can withdraw your money at any time.

(iii) Time Liabilities: It is like your Fixed Deposit Bank Accounts where you cannot immediately withdraw your money but have to wait for a certain period.

25. What are the objectives of SLR?

Ans: Objectives of Statutory Liquidity Ratio (SLR):

(a) Assuring the financial stability of commercial banks by supporting the RBI.

(b) To empower the expansion of Bank Credit. By changing the SLR rates, the Reserve Bank of India can encourage or discourage the growth in interest rates on its long-term lending programs.

(c) By implementing SLR, the central bank obliges commercial banks to purchase or invest in government securities.

(d) The aim is to control the amount of money supply in the Economy. 

(e) SLR helps in guiding the financial policy for the economy. 

(f) Moreover, it helps in ensuring solvency in the financial institutions.

(g) In case of a hike in cash reserve ratio (CRR), statutory liquidity ratio (SLR) will prevent asset liquidation.

26. How SLR Impacts the Economy?

Ans: The government uses the SLR to regulate inflation and liquidity. Increasing the SLR will control inflation in the economy while decreasing it will cause growth in the economy. Although the SLR is a monetary policy instrument of the RBI, the government needs to make its debt management program successful. SLR has helped the government to sell its securities or debt instruments to banks. Most of the banks will be keeping their SLR in the form of government securities as it will earn them an interest income.

27. What is Cash Reserve Ratio?

Ans: A certain proportion or share the bank needs to maintain in form of a cash-out of their total deposit is termed as Cash Reserve Ratio (CRR). CRR is being regulated by the Reserve bank of India and the reserve is either being stored in the bank’s vault or is being sent to the RBI. The share is being maintained so that the amount is immediately available to the customers when they want their deposit back. 

If the current CRR rate is 4%, a bank must keep 4% of its total Net Demand and Time Liabilities (NDTL) in cash. This money cannot be used for investment or lending by the bank.

28. What are the Difference Between CRR and SLR? 

Ans: Difference Between CRR and SLR.

29. What Is Liquidity?

Ans: Liquidity in finance refers to the level of ease with which you can sell an asset, interest, or security without affecting its price. High liquidity means that an asset can be easily converted to cash for the expected value or market price. Low liquidity means that markets have few opportunities to buy and sell, and assets become difficult to trade. The liquidity of an asset can also refer to how quickly it can be converted to cash because cash is the most liquid asset of all. You can calculate a company or person’s liquidity position through ratio analysis, which compares an entity’s assets against their liabilities. An entity is solvent if their total assets are higher than their liabilities, meaning that they can pay their debts and still have working capital left over.

30. What are the Types of Liquidity?

Ans: Here is a brief overview of the three types of liquidity: 

(i) Asset liquidity: The liquidity of an asset refers to how easily that asset can be converted to cash when it is bought or sold. Cash is the highest liquidity asset because it can be traded easily and quickly without any effect on its market value. Stocks and bonds are also considered highly liquid assets, although their liquidity can vary depending on the popularity and reliability of the stock. Examples of illiquid assets include real estate and high art, as although they’re highly prized they can be more difficult to sell and their price fluctuates with the market.

(ii) Market liquidity: Market liquidity refers to the conditions of a market in which an asset can be bought or sold. If market conditions support a high number of buyers and sellers, the market has high liquidity because it is easier to buy or sell your asset at the price you want. Illiquid markets are financial markets in which there are fewer buyers or sellers – for example the market for rare collectibles which makes it harder to sell assets at your desired price. During periods of financial crisis, stock markets become less liquid.

(iii) Accounting liquidity: Accounting liquidity refers to a company’s ability to pay off financial obligations such as marketable securities, cash, inventory, and accounts receivable. Investors looking at a company’s stocks often consider the company’s accounting liquidity, because this can convey the state of a company’s financial health.

31. How to Calculate Liquidity?

Ans: Ratio analysis is a series of equations that calculate the solvency of a company or individual by comparing their assets against their liabilities. Here is a brief overview of three types of liquidity ratios.

(i) Current ratio: Calculating the current ratio a company individual is the simplest and most common way of measuring liquidity.

The current ratio looks at a company’s total current assets-cash assets and otherwise against their total current liabilities like debt obligations. The equation for current ratio is: Current ratio = Current Assets / Current Liabilities.

(ii) Quick ratio: The quick ratio takes higher liquidity assets into account than the current ratio does. The quick ratio considers a company’s cash and cash equivalents, short-term investments, and accounts payable against their current liabilities. Here is how to calculate a party’s quick ratio: Quick Ratio = (Cash and Cash Equivalents, Accounts Payable, ShortTerm Investments) / Current Liabilities. The acid-test ratio is a variation on the quick ratio, subtracting inventories and prepaid costs from current assets. Here is how to calculate the acid-test ratio: Acid-test Ratio = (Current Assets – Inventories – Pre-paid costs) / Current Liabilities. 

(iii) Cash ratio: The cash ratio is the strictest means of measuring a company’s liquidity because it only accounts for the highest liquidity assets, which are cash and liquid stocks. Here is how to calculate cash ratio: Cash Ratio (Cash and Cash Equivalents, Short-Term Investments) / Current Liabilities.

32. Write notes on:

(a) Self-liquidating Paper Theory.

Ans: Self-liquidating Paper Theory: This is considered to be the traditional or conservative theory. According to this theory the early assets of a bank should primarily consist of such assets which are self-liquidating in the short-term viz. Short-term government or semi-government securities, short-term productive advances etc. Such assets are fairly liquid and meet due of the very basic cannons of lending by commercial banks. Short-term securities help the banks in maintaining their liquidity through continuous loan repayments. These can also be pledged with Central Bank if an emergency arises.

(b) Anticipated Income Theory. 

Ans: Anticipated Income Theory: This theory is considered to be the modern theory. The theory has particularly gained prominence since 1930 when commercial banks in USA started granting long-term loans to trade and industry.

According to this theory the liquidity of loans is not simply guaranteed by the period of the loan out by the anticipated income. The loan is intended to produce to the borrower in future. This is particularly true in case of abnormal fall in price of the goods for which the short-term loans may have been given. Even during born periods, the bank may not be in a position to get its loans liquidated because of the borrowers increasing their loans by giving short-term liquidating papers such as, promissory notes or bills and in the process trading beyond their resources.

33. Why the Reserve Bank of India calculate/change the Statutory Liquid Ratio from time to time.

Ans: The reasons for changing Statutory Liquidity Ratio by the Reserve Bank of India are as follows:

(i) Sometimes the RBI raises SLR to reduce commercial banks capacity to create credit and thus helps to control inflationary pressures in the economy. and

(ii) It makes larger resources available to the government.

So, liquidity ratio was raised from 25% to 30% in November 1972 to 32% in 1973, to 35% in October 1981, to 36% in September 1984, to 38% to in January 1988 and to 38.5% effective from September 1990.

It has become 31.5% w.e.f, September 30, 1994. Again it has been reduced to 25%, w.e.f. October 25, 1997. This will considerably argument the lending resources of the banks.

The Reserve Bank increases in percentage of S.L.R. When it wants the commercial bank to contract credit, since a higher ratio leaves with the commercial banks a lower amount of granting credit.

In case the Reserve Bank wants expansion of credit by commercial bank, it lowers the cash reserve requirements since it will leave with the commercial banks a higher amount for granting credit.

34. What is the difference between a bank’s liquidity and its capital?

Ans: Liquidity is a measure of the cash and other assets banks have available to quickly pay bills and meet short-term business and financial obligations. Capital is a measure of the resources banks have to-absorb losses.

Liquid assets are cash and assets that can be converted to cash quickly if needed to meet financial obligations. Examples of liquid assets generally include central bank reserves and government bonds. To remain viable, a financial institution must have enough liquid assets to meet withdrawals by depositors and other near-term obligations.

Capital is the difference between all of a firm’s assets and its liabilities. Capital acts as a financial cushion to absorb losses. The value of a firm’s assets must exceed its liabilities for it to remain solvent.

A typical family’s household finances help to illustrate these two concepts. The family’s assets can include liquid assets, such as money in a checking account or savings account that can be used to quickly and easily pay bills. So a gauge of the family’s liquidity position would include how much money is in the checking account as well as the family’s cash on hand and some other investments such as money market funds.

The family’s assets includes not just liquid assets but also their home and perhaps other investments that are not liquid, meaning they could be sold quickly to realize their value. A measure of the family’s capital position would be the difference between the value of their assets (both liquid and non-liquid) and the family’s liabilities, or the money it owes, such as a mortgage.

Over time, banks have failed or required government assistance because they do not have enough capital, lack liquidity, or a combination of the two.

35. What are the Types of Commercial Banks?

Ans: It is necessary to understand the different types of financial institutions to explain the functions of commercial banks effectively. Commercial banks are commonly categorised into three types.

(a) Public Sector Banks: Public sector banks refer to a type of financial institution that is state-owned by the corresponding Government. A significant part of the share of such organisations is held by the Government.

In India, the Reserve Bank of India, which acts as the central bank, creates operating guidelines for the public sector banks.

(b) Private Sector Banks: Private sector banks are financial institutions registered as companies with limited liabilities. The major part of the share capital of such companies is owned by individuals or private businesses.

(c) Foreign Banks: Foreign banks are financial institutions that are operating overseas within a foreign nation. Post the financial reform of India (in 1991), there was a marked increase in the number of foreign banks on Indian soil. They are essential for the economic development of a nation.

From the above mentioned details, you will get a clear idea about commercial bank definition as well as its functions. For more information on the discussed topic students can refer to Vedantu’s website today. They can also avail study solutions on the introduction of commercial banks from us and avail a detailed idea.

36. What is Capital Structure?

Ans: Capital structure refers to the amount of debt and/or equity employed by a firm to fund its operations and finance its assets. A firm’s capital structure is typically expressed as a debt-to-equity or debt-to-capital ratio. Debt and equity capital are used to fund a business’s operations, capital expenditures, acquisitions, and other investments. There are tradeoffs firms have to make when they decide whether to use debt or equity to finance operations, and managers will balance the two to find the optimal capital structure.

37. What are the Importance of Capital Structure? 

Ans: Capital structure is vital for a firm as it determines the overall stability of a firm. Here are some of the other factors that highlight the importance of capital structure.

(i) A firm having a sound capital structure has a higher chance of increasing the market price of the shares and securities that it possesses. It will lead to a higher valuation in the market.

(ii) A good capital structure ensures that the available funds are used effectively. It prevents over or under capitalisation.

(iii) It helps the company in increasing its profits in the form of higher returns to stakeholders.

(iv) A proper capital structure helps in maximizing shareholder’s capital while minimizing the overall cost of the capital.

(v) A good capital structure provides firms with the flexibility of increasing or decreasing the debt capital as per the situation.

38. What are the Factors Determining Capital Structure? 

Ans: Following are the factors that play an important role in determining the capital structure:

(i) Costs of capital: It is the cost that is incurred in raising capital from different fund sources. A firm or a business should generate sufficient revenue so that the cost of capital can be met and growth can be financed.

(ii) Degree of Control: The equity shareholders have more rights in a company than the preference shareholders or the debenture shareholders. The capital structure of a firm will be determined by the type of shareholders and the limit of their voting rights.

(iii) Trading on Equity: For a firm which uses more equity as a source of finance to borrow new funds to increase returns. Trading on equity is said to occur when the rate of return on total capital is more than the rate of interest paid on debentures or rate of interest on the new debt borrowed.

(iv) Government Policies: The capital structure is also impacted by the rules and policies set by the government. Changes in monetary and fiscal policies result in bringing about changes in capital structure decisions.

39. What are the types of Capital Structure?

Ans: The meaning of Capital structure can be described as the arrangement of capital by using different sources of long term funds which consists of two broad types, equity and debt.

(i) Equity Capital: Equity capital is the money owned by the shareholders or owners. It consists of two different types-

(a) Retained earnings: Retained earnings are part of the profit that has been kept separately by the organisation and which will help in strengthening the business.

(b) Contributed Capital: Contributed capital is the amount of money which the company owners have invested at the time of opening the company or received from shareholders as a price for ownership of the company.

(ii) Debt Capital: Debt capital is referred to as the borrowed money that is utilised in business. There are different forms of debt capital.

(a) Long Term Bonds: These types of bonds are considered the safest of the debts as they have an extended repayment period, and only interest needs to be repaid while the principal needs to be paid at maturity.

(b) Short Term Commercial Paper: This is a type of short term debt instrument that is used by companies to raise capital for a short period of time.

(iii) Optimal Capital Structure: Optimal capital structure is referred to as the perfect mix of debt and equity financing that helps in maximising the value of a company in the market while at the same time minimises its cost of capital. Capital structure varies across industries. For a company involved in mining or petroleum and oil extraction, a high debt ratio is not suitable, but some industries like insurance or banking have a high amount of debt as part of their capital structure.

(iv) Financial Leverage: Financial leverage is defined as the proportion of debt that is part of the total capital of the firm. It is also known as capital gearing. A firm having a high level of debt is called a highly levered firm while a firm having a lower ratio of debt is known as a low levered firm.

1. Give arguments in favour and against nationalisation of banks in our country.  

Ans: In 1969, the Government of India nationalised 14 major private banks; one of the big banks was Bank of India. In 1980, 6 more private banks were nationalised. These nationalised banks are the majority of lenders in the Indian economy. They dominate the banking sector because of their large size and widespread networks.

Arguments in favour of nationalisation:

(i) It would enable the government to obtain all the large profits of the banks as its revenue

(ii) Nationalization would safeguard interests of public and increase their confidence thereby bringing about a rapid increase in deposits. Thus preventing bank failures

(iii) It would remove the concentration of economic power in the hands of a few industrialists

(iv) It would help in stabilizing the price levels by eliminating artificial scarcity of essential goods

(v) It would enable the baking sector to diversify its resources for the benefit of the priority sector.

(vi) Eliminates wasteful competition and raises the efficiency of the working of banks

(vii) Enables rapid increase in the number of banking offices in rural & semi-urban areas & helped considerably in deposit mobilization to a great extent

(viii) Necessary for the furtherance of socialism and in the interest of community

(ix) Enables the Reserve Bank to implement its monetary policy more effectively

(x) It would replace the profit motive with service motive

Arguments against nationalisation (Criticism)

(i) Political purpose rather than for Productive purpose: The government has acquired the strength of a giant and there is the danger of using the financial resources for political pur­poses rather than for productive purpose.

(ii) Beginning of state capitalism: Such a drastic step of nationalisation of about 90% of the banking resources is wholly unnecessary, especially if we take into consideration the enormous powers vested in the Reserve Bank of India for controlling banks’ resources. It is considered as the beginning of state capitalism and not socialism in India.

(iii) Scope for inefficiency: Some are of the opinion that after nationalisation banks will degenerate to the level of agricultural co-operatives, which are known for their inefficiency and corrupt practices.

(iv) Less attractive customer’s service: Inefficiency, indeci­sion, corruption, and lack of responsibility are the evils with which the government under­takings are suffering. A government bank may not care to attach importance to the cus­tomer service.

(v) Secrecy of customer’s accounts: In spite of the assurances given and provisions made in the Act, businessmen still fear about the maintenance of the secrecy of the customer’s accounts. As such, they may be forced to withdraw their deposits and go to some bank in the private sector and foreign banks. Thus nationalisation of big Indian banks .will diverts some of the deposits of Indian banks to the foreign banks which is not at all desirable.

(vi) Branch expansion: To argue that nationalisation will help to facilitate branch expan­sion to rural areas much more rapidly than the private banks cannot be supported by facts. Weather it is private bank or nationalised bank; it has to go by business principles and satisfy itself that the new branch is economically viable. In other words, branch expansion can be achieved by private banks as well, without nationalisation.

(vii) Burden of compensation: Nationalisation leads to the payment of heavy compensa­tion to the shareholders. This gives additional financial burden on the government. More­over, it is also argued that nationalisation will not bring much income to the government.

2. What is the meaning of the term “Social Control Over Banks”? Explain the steps taken towards social control over banks.

Ans: The expression “Social Control” in relation to banks and banking came into vogue since about December 1967. There were complaints that bulk of bank advances were directed to the large and medium scale industries and big and established business houses and that the sectors demanding priority such as agriculture, small scale industries and exports were not receiving their due share. It was also alleged that the directors of banks, who were mostly industrialists influenced many banks in granting * indiscriminate advances to such companies, firms or institutions, in which the directors were substantially interested. These and other alleged mismanagement of the banks, in view of certain critics, justified their demand for nationalization of banks. The Government, however thought that it would be advisable to allow the commercial banks to function in the private sector, but to impose such further control and restrictions upon them as would determine priorities for lending and investment, evolve appropriate guidelines for management, promote a reorientation of the decision making machinery of banks and leave no opportunity in the hands of the bank managements and directors to mismanage as alleged the proposed imposition of the additional control and restrictions was termed as social control.

The government initiated the scheme of social control in December 1967 and for that purpose the following steps were taken: 

(i) Setting up of a National Credit Council (NCC). and 

(ii) Introducing legislative controls by amending the Banking Regulation Act.

The steps are explained below:

(i) Setting up of a National Credit Council (NCC): National Credit Council was set up under the Resolution of the Government in 1967. Its functions are-

(a) to assess the demand for bank credit from various sectors of the economy.

(b) to determine priorities for grant of loans and advances and for investment having regard to the availability of resources and requirements of priority sectors in particular agriculture, small-scale industries and exports. and 

(c) to coordinate lending and investment policies as between commercial banks and co-operative banks and other specialised agencies to ensure the optimum and efficient use of the overall resources.

The council consists of 25 members of whom five are permanent. 

(a) The Finance Minister as the chairman.

(b) The Deputy Governor of the R.B.I as the Vice Chairman.

(c) The Deputy Chairman of the Planning Commission.

(d) The Secretary Finance Ministry (Deptt. of Economic Affairs). and 

(e) The Chairman of the Agricultural Refinance Commission, are the five permanent members.

The remaining twenty are appointed by the Government to secure adequate representation from various sectors.

(ii) Introducing legislative controls by amending the Banking Regulation Act: The second step towards social control is the passing of Act 58 of 1968 which introduced radical amendments in certain provisions of the Banking Regulation Act. Starting in the preamble that the amendments are intended “to provide for the extension of social control over banks.”

The additional controls and restrictions as imposed by the Amending Act can be broadly outlined as under:

(a) Constitution of the Board of directors of a banking company to the effect that the directors having special knowledge and practical experience in respect of certain specified subjects related to banking, are in majority over the directors who are merely industrialists as popularly known.

(b) Management of the affairs of a banking company by a whole time Chairman who has special knowledge of and practical experience in the working of a bank or financial, economic business administration.

(c) Restrictions on loans and advances by a banking company to its directors or to a company or firm in which a director is substantially interested or to an individual for whom a director is a guarantor.

(d) Additional powers conferred on the Reserve Bank of India to enforce and supervise the social control.

(e) Punishment for.

(i) obstructing any person from lawfully entering or leaving a bank.

(ii) holding demonstration within a bank.

(iii) acting to undermine depositor’s confidence in a bank.

(f) Special powers of Central Government to acquire undertakings of banking company when it is satisfied on a report from the Reserve Bank that the banking company has committed certain defaults and that it is necessary to do so.

3. Briefly discuss the effect of bank nationalization in India. Why the nationalization of banks was considered essential in India? Discuss. 

Ans: The progress made by the banking industry since nationalization has been most significant and impressive. During the period upto end of January, 1972 the public sector banks have opened up 3418 new offices and their deposits have increased from Rs. 2,815 crores to Rs. 3,897.4 crores. A greater number of population is now being served with banking facilities than before nationalization, the average population served per bank has declined from 65,000 in 1969 to 42,000 in June 1971. Credit to neglected sectors rose from Rs. 686.73 crores in December, 1969 to Rs. 961.02 crores by December 1971. The Reserve Bank of India has already issued instructions that certain specific weaker sectors of the community should be charged a concessional rate of interest at 4½ percent. 

Since nationalization there has been substantial spurt in the opening of new accounts and it is felt that with the opening of new branches much of the hitherto untapped resources lying idle in the rural sector will be brought soon into effective use by virtue of those sums being deposited with the banks.

The divergence of finance to rural areas representing agriculture, assistance to transport operators etc. has been substantial which is clear from the following table.

From June 1969 to June 1971, the agricultural finance has considerably increased. The other sectors like, small scale industry, road transport operators, retail trade and small business. Professional and self-employed and education also received due attention from the public sector banks.

Advances to Priority Sectors by Public Sector banks (Rs. in crores) 

One of the significant results of the nationalization has been the increase of branches in rural and semi-urban areas as is evidenced by the fact that during the period from June 1969 to October 1971 the number of branches in rural and semi-urban areas have increased by over 65 and 19 percent respectively.

Again, the advances to small-scale industries by all scheduled commercial banks are shown during the period from 1969 to 1971 in the following table:

Advances to Small-Scale Industries by Scheduled Commercial Banks (Rs. in crores) 

One of the significant results of the nationalization has been the increase of branches in rural and semi-urban areas as is evidenced by the fact that during the period from 1969 to 1971 the number of branches in the rural and semi-urban areas have increased by over 65 and 19 percent respectively.

Nationalisation is consider essential in india: 

The scheme of social control initiated by the Government was found to be unsatisfactory and inadequate by the Government. So, Nationalization of banks was, therefore, considered essential in order to gain control over the commanding height of the economy and utilize the banking system as an effective instrument of economic development. 

Broadly, the four objective to be served by this new policy were:

(i) To make credit planning part of the larger national plans and fit it into the overall objectives of the state.

(ii) To allocate and channel credit according to the requirements of planned economic development.

(iii) To eradicate or to reduce, to the extent possible, the regional disparities both in the undeveloped states and in the backward pockets of developed states through the spread and diversification of banking which was to be an active tool in bringing about a balanced development of these areas and the country as a whole.

(iv) To assign to individual banks, as Lead Banks, the task of deploying credit at the district level with a view to activating growth. The government therefore nationalised the 14 major commercial banks on July 19, 1969.

The following objectives of nationalization were enunciated in Parliament:

(a) The nationalisation of major banks was a significant step towards mobilisation of people’s savings and canalising them for productive purposes in accordance with our plans and priorities.

(b) The Government believed that public ownership of major banks would help in the most effective development of national resources so that Government’s objectives could be realised with a greater degree of assurance.

(c) Even after nationalization, the legitimate credit needs of private industry and trade, big or small, would be met.

(d) Government would try to ensure that the needs of productive sectors of the economy and in particular those of farmers, small scale industrialists and self-employed professional groups were met in an increasing measure.

(e) It would be one of the positive objectives of nationalised banks to actively foster the growth of new and progressive entrepreneurs and to create fresh opportunities for hitherto neglected and backward areas in different parts of the country.

(f) Public ownership would help to curb the use of bank credit for speculative and other unproductive purposes.

(g) The step would bring about the right atmosphere for the development of adequate professional management in the banking field.

(h) The interest of depositors of the nationalised banks would not only continue to be fully safeguarded but would now have the backing of the state itself.

The commercial banking structure thus underwent a complete transformation in as much as the public sector banks comprising the State Bank of India and its seven associated banks and the state sector embracing the fourteen major commercial banks together accounted for approximately 85 percent of the total resources of the Indian banking system. The qualitative transformation was from elitist banking to “mass banking” intended to serve the financial needs of even the smallest man with a viable scheme.

4. What are the reasons for nationalization of business? What are the Advantages of Nationalisation? Explain.

Ans: Below are some of the reasons for nationalization of business:

(a) For strategic reasons: This is usually the case when there is war or when the government is trying to regulate the economy. Take for instance, if the government wants to go into war with another country, it can quickly nationalize every business owned by the opposing nation so as to limit their income.

(b) To prevent exploitation: Another reason why the government might consider nationalizing a business is to prevent exploitation by those private individuals. So if the government notices that citizens are been exploited by a business, because of its monopoly, it might decide to nationalize the business.

(c) Political reason: When the relationship between two nations get bad, the government of both countries can decide to nationalize businesses owned by the other nation as a way of preventing or reducing the national income of the country.

(d) To avoid foreign dominance of the economy: A way of preventing dominance of the economy by foreigners is also through nationalization. For instance, if the government of Nigeria take a step to nationalized Chinese companies in the country, there is going to be a large decrease in the number of Chinese people in Nigeria because, majority of them will have to travel back to their own nation.

(e) Need for large capital: Another reason for nationalization is for companies to get large capital from the government. Take for instance, if a company needs capital which can only be provided by the government, it will allow the government to nationalize their business so that they can get the required capital.

(f) To prevent wasteful competition: Nationalization can also be with the aim of preventing wasteful competition among companies, especially service companies. The government can come in and take over the ownership and management of such companies.

(g) To provide uninterrupted services: When essential services like electricity, water supply etc., are owned by private individuals in a nation, the government can also nationalize those services to make sure that citizens get the best out of those services.

Advantages of Nationalization are: 

(a) It helps to check exploitation: Just like I have discussed before, Nationalisation of helps to stop exploitation by foreign and private businesses in the nation. When the government take control of the business, citizens will enjoy because the government might provide that same service for free or fore a lesser amount.

(b) It ensures steady supply of essential services: When essential services like water supply is owned by private individuals in a country, it won’t be as efficient as when it is owned by the government. Thus, nationalization is a way of through which can ensure efficiency in the supply of some goods or services.

(c) Encourages efficient use of resources: It encourages more efficient use of economic resources.

(d) Protection of strategic industries: The government can also nationalize a business due to the fact they the business is so important that it should not be allowed to be in the hands of a private individual or foreign investor.

(e) Ensures equitable distribution of resources: Since the sole aim of the government is to provide for the needs of the whole nation, nationalization of businesses tends to benefit every part of the country more than when those businesses were owned by private individuals. It ensures equitable distribution of resources as well as correct any imbalance in the means of production.

(f) Elimination of Monopoly: This is also one of the major advantages of nationalization. By taking over privately owned and foreign companies, there is a large decrease in private monopoly.

(g) Mobilisation of capital: When a business is nationalized, large capital can be mobilised to ensure large scale investment.

5. What are the 10 main Criticisms against Nationalisation of the Banks?

Ans: The various criticisms against nationalisation of banks can be summarized as follows:

(i) Political purpose rather than for Productive purpose: The government has acquired the strength of a giant and there is the danger of using the financial resources for political purposes rather than for productive purpose.

(ii) Beginning of state capitalism: Such a drastic step of nationalisation of about 90% of the banking resources is wholly unnecessary, especially if we take into consideration the enormous powers vested in the Reserve Bank of India for controlling banks’ resources. It is considered as the beginning of state capitalism and not socialism in India.

(iii) Scope for inefficiency: Some are of the opinion that after nationalisation banks will degenerate to the level of agricultural cooperatives, which are known for their inefficiency and corrupt practices. Some fear that the officers who manage these big banks also have to bow down to the politicians in course of time.

(iv) India’s prestige abroad: The political prestige of India in foreign countries was dam-aged by this act of nationalisation. Doubts are expressed especially in countries which are rendering large-scale financial assistance to India, about the assurances and promises given by the government with regard to freedom of foreign enterprise in India. This may adversely affect the foreign assistance which India was receiving then.

(v) Less attractive customer’s service: The nationalised banks are sure to join the ranks of other public undertakings which are known for their working to losses. Inefficiency, indecision, corruption, and lack of responsibility are the evils with which the government under-takings are suffering. A government bank may not care to attach importance to the customer service.

(vi) Secrecy of customer’s accounts: In spite of the assurances given and provisions made in the Act, businessmen still fear about the maintenance of the secrecy of the customer’s accounts. As such, they may be forced to withdraw their deposits and go to some bank in the private sector and foreign banks. Thus nationalisation of big Indian banks will diverts some of the deposits of Indian banks to the foreign banks which is not at all desirable.

(vii) Promises may not materialise: Nationalisation cannot convert the commercial banks overnight into agricultural banks. Similarly, the hopes raised among the poor and middle class people about the bank loans may ultimately prove to be false.

(viii) Industry and trade may suffer: Diversion of large sums of finances from the industry and trade to agricultural is sure to starve the large-sized industries and business for finance. We cannot ignore the fact that the big industries and business are providing employment to millions of people and largely contributing to the production of wealth. To starve them for finance simply because they are ‘big’ will be upsetting the job opportunities and production in these concerns.

(ix) Branch expansion: To argue that nationalisation will help to facilitate branch expansion to rural areas much more rapidly than the private banks cannot be supported by facts. Weather it is private bank or nationalised bank; it has to go by business principles and satisfy itself that the new branch is economically viable.

In other words, branch expansion can be achieved by private banks as well, without nationalization.

(x) Burden of compensation: Nationalisation leads to the payment of heavy compensation to the shareholders. This gives additional financial burden on the government. Moreover, it is also argued that nationalisation will not bring much income to the government.

In spite of these criticisms, we cannot ignore the fact that at present, nationalisation of banks is an accomplished fact. By and large this measure received support from almost all sections of the public. It was welcomed by the middle class people and small industrialists and small traders.

Nationalisation is designed to accelerate the tempo of investment and production to raise the living standards of the people. But it should be noted that nationalisation is not an end in itself- it is a means to the end of increasing the economic prosperity.

The success of the measure depends upon the new vigour and dynamism which the nationalised banks can bring about in mobilising the nation’s savings and applying them for the rapid economic development to the country.

6. Express the view of the Banking Commission regarding indigenous bankers. Discuss the recommendations of the National Banking Commission. 

Ans: The Banking Commission has appreciated the role played by the indigenous bankers particularly in the areas (i.e. the small and medium categories of traders and businessmen) which are very much productive but not covered by the commercial banks. The commission is of the view that it was ‘neither necessary nor practicable to have a direct link between the Reserve Bank and the indigenous bankers. The best way is to have indirect control over the business of the indigenous bankers through commercial bank. The Reserve Bank should lay down norms and guidelines for the commercial banks to deal with the indigenous bankers.

The recommendations of the National Banking Commission:

The recommendations of the National Banking Commission gave further expression to the changed thinking about the new role of commercial banks.

The main purpose of bringing the banking system into the ambit of national policies was to make it an effective tool of economic development and social growth.

In a vital matter concerning a whole. sub-continent, every system or organisation is expected to play a particular part and is therefore assigned a certain distinctive role by the authorities that be. As a concomitant, the particular organisation concerned (the banking system) must have a clear notion of what is expected of it.

So, after setting the role, banks have prepared to formulate sub-plans. 

The main components of such plans are grouped and broadly classified below:

(a) Branch Expansion.

(b) Deposit Mobilization.

(c) Credit Development.

(d) Other Role.

(a) Branch Expansion: Branch expansion received an impetus on the introduction of social control. This gathered further momentum after nationalisation. The growth rate has been an unparalleled one. The offices of banks, which numbered 8,262 in June 1969 had reached the figure of 20,437 by the end of 1975.

The average population served per branch had come down from 65,000 on the eve of nationalisation to 27,000 on the basis of 1961 census, at the end of 1975. However, it must be added that the growth of bank offices is not uniform in all the states.

Geographical Spread:

The branch expansion programme has been according to the following rationale:

(i) Expansion in unbanked areas: Banks were required firstly to take up unbanked towns for opening branches, initially the district towns and gradually penetrate into the smaller towns and clusters of villages. Special attention was paid to the relatively underbanked states and underdeveloped regions of developed states.

(ii) Expansion of banked centres: Opening of branches in satellite towns and suburban areas was also encouraged so that new and growing areas of activity did not suffer from lack of banking facilities.

(iii) Expansion in Metropolitan Cities: In order to safeguard the profitability and inherent strength of banks, banks were also permitted to open branches in metropolitan cities and large towns. However, the Reserve Bank of India maintained a certain proportion between such branches and those to be opened in the unbanked rural centres. This provides due motivation to banks.

(b) Deposit Mobilisation: In the pre-nationalisation period, no doubt the growth of banking facilities and the rise in per capita income had contributed to a substantial growth of deposits, but this was mainly confined. to the urban areas. Thus, geographical coverage of such areas became a necessity for mobilising deposits.

Many attractive and indigenous schemes of deposit mobilisation have been evolved based on careful study of the social pattern of particular groups, their income levels and expenditure styles. A variety of schemes such as, retirement plans, recurring deposit schemes, monthly investment schemes, Janata deposit scheme, gift cheques, prize bonds etc. are in operation.

(c) Credit Development Credit has not widely and evently distributed between different states and regions of the country. Further more, other weaker sections of the community and small borrowers were virtually denied institutional credit.

The National Credit Council (NCC) came to the conclusion that the inability of the small borrowers to provide security to satisfy the conventional norms of commercial banking had acted as a serious hindrance. Bank officers generally lacked experience in handling small loans and were, therefore inclined to avoid it as risky business.

(d) Other Role: In keeping with the RBIs policies, bank had to restrict credit for speculative, non-productive and low priority uses, and this has had an important bearing on the price level. The interest rates charged by banks also make an impact on incomes and prices. In an inflationary situation, bank credit to units producing essential goods, particularly wages goods and critical raw materials helps to overcome shortages.

7. Discuss in details about the nationalisation of banks in the country. What were the achievements made by the nationalised bank in India?

Ans: After independence, Government wanted to make India a socialistic pattern of society. This means, in non-technical language, a society with wealth distributed as equitably as possible without making a country a totalitarian state. The goal was purported to be achieved through democratic processes. With this aim in view, a mixed pattern of planning is evolved. The two sectors, private and public are allowed in function independently of each other. The public sector is fully owned and controlled by the Government. The private sector is regulated through a system of regulations, licences etc.

The steps had been taken in January 1969, by amending the Banking Regulation Act, for the purposes of imposing social control. With a view to remedy, the basic weaknesses of the Indian Banking System and to ensure that banks would cater to the needs of the hitherto neglected and weaker sections of the community instead of big business houses, but, it was observed that the imposition of Social Control’ had not changed the position very much and there were complaints that the Indian commercial banks continued to direct their advances to large and medium scale industries and that the sectors demanding priority such as agriculture, small scale industries and exports were not receiving the attention due to them of the banks.

So, on 19th June, 1969 fourteen major banks were nationalized. 

The corresponding new banks and the existing banks’ whose business was taken over are as follows:

Nationalized banks were expected to give priorities to the schemes of the neglected sectors and exports, to meet some of the demands of the public sector undertakings and to use the balance of the available sources for organized industries on the basis that new enterprises and those in backward areas will be preferred to the big business houses. To achieve these objects sectors constituting weak and backward areas and the exporting sector may be charged lower rate of interest than that charged to established businesses thereby subsidizing these sectors. 

After 11 years of the first phase of bank’s nationalization on April 15, 1980, the President of India promulgated on ordinance to provide for the acquisition and transfer of undertakings of certain banking companies in order to further control the heights of the economy, to meet progressively and serve better needs of the economy and to promote welfare of the people in conformity with the policy of the state.

The ordinance decided in transforming the ownership of six more private sector banks each having deposits of Rs. 200 crores or more on the 31st March, 1980. The ordinance later on became an Act providing for the transfer of undertakings of these banks.

The corresponding ‘new banks’ and the existing banks’ whose business was taken over were as follows:

The objectives of nationalization of banks are as follows: 

(i) Mobilization of people’s savings to the largest possible extent and to utilize them for productive purposes in accordance with our plans and priorities.

(ii) The operation of the banking system should be influenced by a large social purpose and should be subject to close public regulation. 

(iii) Legitimate credit needs of private sector industry and trade; big or small should be met.

(iv) Use of bank credit for speculative and other unproductive purposes will be curved.

(v) Banks should ensure that the needs of small-scale industrialists and self-employed professional groups are met in an increasing manner. 

(vi) Nationalized banks should look after the growth of the new and progressive entrepreneurs and create fresh opportunities for hitherto neglected and backward areas in different parts of the country.

(vii) There will be development of adequate professional management in the banking field and new managerial techniques and practices will develop.

(viii) Bank staff will be provided training as well as reasonable terms and service.

(ix) The emphasis are priority areas, new entrepreneurs and backward areas will not be at the cost of economic viability.

Nationalization gave birth of a new era in the field of banking. The total number of public sector banks has increased to 27. These include State Bank of India, its seven subsidiaries and the nineteen nationalized banks excluding Regional Rural Banks. These public sector bank accounted for about 91% of the total deposits and credits of all commercial banks in April, 1980.

The various achievements made by the nationalised bank in India are discussed below:

(A) Development of Banking Industry:

(i) Lead Bank Scheme: The lead bank scheme was introduced by the Reserve Bank of India towards the end of 1969 with the objective of enabling the commercial banks to assume the role of leadership for the development of banking and credit facilities throughout the country on the basis of area approach.

Under this scheme, all the districts in the country have been allotted to the State Bank Group, nationalised banks and private Indian banks. A lead bank is assigned the role of a catalytic agent of economic development through the expansion of bank branches and diversification of credit facilities in the district allotted to it.

(ii) Branch Expansion: There has been a spectacular expansion of bank branches after nationalisation of major commercial banks in 1969. The lead bank scheme has played an important role in the bank expansion programme.

The number of branches of all scheduled commercial banks, which increased from 4151 to 8262 (i.e., about 100% increase) during the 18 years of pre-nationalisation-period (1951-1969), has further gone up from 8262 to 53840 (i.e., 552% increase) during the 18 years of post nationalisation period (1969-87).

The banking coverage in the country as a whole has also considerably improved from one office for 87 thousand people in 1951 to one office for 65 thousand people in 1969 and one office for 15 thousand people in 2006. The number of bank branches in 2014 was 121535.

(iii) Reduction of Regional Imbalances: Regional imbalances can deprive you of banking facilities in required areas. Since the nationalization of banks, a systematic approach was in execution, to ensure the presence of banks and bank-related facilities in deficit areas. It aims at providing a bank within 10 Km distance, for each village. One of the greatest achievements of the nationalization of banks was that regional biasness got eliminated.

(iv) Bank Deposit Expansion: There has been significant growth in the deposits of commercial banks since nationalization. During the pre nationalization period; bank deposits grew from 908 Crore rupees in 1951 to 4,646 Crore rupees in 1969. Post nationalization, this number increased to 1,07,345 Crore rupees in 1987. The deposits rose to 83,36,175 Crore rupees in 2014.

More deposits mean there is more money flowing in the system. Money becomes available to a large portion of the population in the form of credit and loans. This can promote growth in India.

(v) Change in Composition of Deposits: Post nationalization of banks, there has been a difference in the proportion of term deposits and demand deposits. Term deposits or time deposits are deposits for a fixed period of predetermined time. It can range from months to years. Whereas,. demand deposits are those which offer greater access to your money. It can be withdrawn without prior notice.

(vi) Bank Credit Expansion: Bank credit is the total amount available to an individual for personal or commercial use from a banking institution. This has increased post nationalization from 3,599 crores in 1969 to 63,753 crores in the later period. This expansion is a symbol of growth across sectors. It also means accessibility to bank facilities has increased.

(vii) Coverage of Rural Areas: The main thrust of branch expansion policy in the post-nationalisation period has been on increasing the banking facilities in the rural areas. There has been a significant increase in the rural branches of banks since 1969. The number of branches in rural areas having population upto 10,000 has increased from 1832 in June 1969 to 46976 in June 2014.

The percentage of bank branches in rural areas to the total branches has risen from 22.2% in June 1969 to 37.2% in June 2011. Of the additional branches opened between June 1969 to June 2006 (i.e., 61354), 50% were in rural areas.

(viii) Investment in Government Securities: The nationalized banks were also expected to provide finance for economic plans of the country through the purchase of government securities. There has been a significant increase in the investment of the banks in government and other approved securities which increased from Rs. 1727 crore in March 1970 to Rs.. 2437760 crore in 2014.

(ix) Financial Inclusion: Financial inclusion has been embodied as an objective of economic policy in India since independence. However, since 2006, it has been an explicit policy endeavour of the Reserve Bank. Various initiatives have been undertaken by both the Reserve Bank and the Government of India to ensure universal financial access especially post 2005.

(x) Pradhan Mantri Jan Dhan Yojana: Pradhan Mantri Jan Dhan Yojana, launched on August 28, 2014, is a massive financial inclusion scheme with a record 1.5 crore bank accounts opened on the inaugural day. The scheme aimed at ending the financial untouchability for the poor by providing them bank accounts and debit cards. The scheme was expected to cover 7.5 crore people by January 26, 2015, who will be provided zero-balance accounts with ‘RuPay’ debit cards, life insurance cover of Rs. 1 lakh. Later, the account holders will be provided an overdraft facility up to Rs.5000.

(xi) Women’s Bank – Bharatiya Mahila Bank Limited: With a view to promote gender equality and economic empowerment of women, the Government of India took a decision to set-up an all-women bank, Bharatiya Mahila Bank Limited (BMB), in 2013 to address the gender related aspects of financial access to all sections of women, empowerment of women and financial inclusion.

(B) Financing of Priority Sectors:

(i) Lesser Importance to Big Industries: The sectoral deployment of credit has undergone a great qualitative change after the nationalisation of banks. In the pre-nationalisation days, large and medium industries and wholesale trade account for about 78% of the total bank credit, while agriculture accounted for only 2.2% of the total bank credit.

(ii) Advances to Priority Sectors: One of the main objectives of nationalisation of banks was to extend credit facilities to the borrowers in the so for neglected sectors of the economy. To achieve this objective, the banks formulated various schemes to provide crédit to the small borrowers in the priority sectors like agriculture, small scale industry, road and water transport, retail trade, and small business.

(iii) Agricultural Finance: After nationalisation, the commercial banks have been giving special attention to the financial needs of agriculturists and of rural areas.

(iv) Bank Credit for Small Scale Industries: Small scale industries sector has also been recognised by the government as an important productive sector of the economy which deserves special financial assistance by the commercial banks. Keeping this in mind, various facilities and concessions have been made available to this sector from the banks, particularly after their nationalization in 1969.

(v) Banks and Export Promotion: In a developing economy like India, there is a great need to promote exports in order to earn sufficient foreign exchange to be able to meet the country’s large and growing foreign exchange obligations. In view of this, the government has taken a number of measures to enable the commercial banks to provide sufficient and easy finance to the exporters.

(vi) Housing Finance: Housing finance is another priority sector and the public sector banks play a crucial role in this area. The major issue in respect of housing finance is how to bridge the gap between the demand for housing finance and its supply from all sources put together.

(vii) Credit to Weaker Sections: In order to increase the flow of bank credit to the smaller and poorer borrowers the government has broadened the concept of weaker sections of the society. Now the weaker sections include small and marginal farmers, landless labourers, tenant farmers and share croppers, artisans, village and cottage industries, beneficiaries of Integrated Rural Development Programme, scheduled castes and scheduled tribes, and beneficiaries of differential rate of interest scheme. By March 2010, these weaker sections have been provided the bank credit of Rs. 212215 crore which accounted for 10.2% of the total credit of public sector banks.

(viii) Differential Rate of Interest Scheme: With a view to provide bank credit to the weaker sections of the society at a concessional rate, the government introduced the differential rate of interest scheme from April 1972. Under this scheme, the public sector banks have been providing loans at 4% rate of interest to the weaker sections of the society who do not have any tangible security to offer, but who can improve their economic condition with the financial support from the banks.

The scheme has shown notable progress. As on March 31, 2010, the outstanding differential rate of interest credit was of Rs. 752 crore. 

(ix) Kisan Credit Card Scheme: Kisan Credit Card scheme was introduced in 1998-99 to provide better access to short-term institutional credit (i.e., from commercial banks and Regional Rural Banks) to farmers.

(x) Mudra Bank: Pradhan Mantri Micro Units Development and Refinance Agency (MUDRA) Yojana was launched on April 8, 2015, with the objective of ‘funding the unfunded’. The MUDRA Yojana or bank, which has a corpus of Rs. 20,000 crore, can lend between Rs. 10, 000 to Rs. 10 lakh to small entrepreneurs. The scheme has been set up for development and refinance activities relating to micro units. It will provide refinance to banks and other institutions at 7%.

8. What are the Advantages and disadvantages of private. Banking? Write the List of Private sector banks in India.

Ans: Here are some of the benefits you can expect with private banking:

(a) A dedicated representative: The biggest advantage of private banking is having a dedicated person – or a team of people who already knows your circumstances. Private banking can make it easier to deposit checks, initiate wire transfers, order checks and more. Some of these might not even require an in-person vișit. Because the private banker or wealth management team knows your situation, it saves time. Otherwise, you may have to repeat your situation and preferences every time you need something at the bank. 

(b) Ability to connect with a network of specialists: The private banker is the quarterback who connects you with others on the team, such as a tax attorney or trust and estate adviser, For says. Having the ability to have your private banker or wealth manager set up meetings with specialists can be a time-saving perk.

“The key to our business success is having a comprehensive and multidisciplinary set of professionals, who have expertise in a wide range of important financial areas,” says Joe Calabrese, national head of wealth advisory services at Key Private Bank.

(c) Personal attention: For ultra-high-net-worth individuals, the benefits and services might be even more detailed. “At some level, when you go high up the spectrum and you’re talking about a real white glove type of relationship, you might have concierge services that are even doing more personal, philanthropic support,” Foy says. “Even event planning or helping to make arrangements for vacations. It definitely kind of bleeds into [a] personal assistant outside of any specific banking needs.”

(d) Perks, freebies and potentially better pricing: Private banking could include discounts, ranging from the potential for a free safe-deposit box of a certain size to the potential for free checks.

“You’re going to get preferential pricing regardless of whether you’re talking about fees for managing your assets or other services that you get with the institution,” Foy says.

(i) This may potentially include a lower annual percentage rate (APR) on a mortgage or home equity loan or a higher annual percentage yield (APY) on a savings account or CD.

(ii) Private banks tend to have events for their clients, Calabrese says.

(iii) “We run the gamut,” Calabrese says. Though during the pandemic, events need to be different than they were traditionally.

(iv) “We’re doing our best to find virtual opportunities to engage with our clients,” Calabrese says. This includes events like virtual wine tasting. 

(e) Business benefits: Business owners can also benefit from having their personal private banking or wealth management relationship with the same bank as their business account. This relationship may help secure commercial lending opportunities or discounts or benefits on the business banking side. “I think business owners are going to represent a reasonably significant percentage of private banking clients,” Foy says. 

(i) Private Sector Banks offer quick service to the customers.

(ii) These banks also offer customized services according to the customer’s financial needs.

(iii) Private Sector Banks has a streamlined management system. 

(iv) Quick financial decision making is possible in private sector banks.

Disadvantages of private banking are:

(a) You may be losing out on interest: If you have to commit a sizable amount of money to an account with a low annual percentage yield, it might make sense to think twice about private banking. Or, you can at least aim to put the bulk of the savings in an account earning a competitive APY, though these savings rates are significantly lower with the Federal Reserve cutting rates to near zero in 2020.

(b) High management fees: It’s smart to compare the fees for having your money managed at a wealth management firm with other alternatives. Management fees are typically around 1 percent of investments, usually charged annually, Foy says.

(c) Private bankers come and go: Turnover can be a factor as well. If your private banker or wealth manager leaves the financial institution, you’ll have to choose whether to stay with the firm or move with your representative.

(a) Private Sector Banks charge extra on every financial service. 

(b) These banks only operate in cities and out of reach for the rural population.

(c) Private Sector Banks offer no job security to the employees. Write the List of Private sector banks in India.

Private-sector banks 

At present, there are 21 private banks in India, as of 26 August 2021.

9. Enumerate the Importance of Indigenous Bankers. Explain the Functions of Indigenous Bankers.

Ans: The indigenous bankers have been playing a significant role in the economic life of India. When commercial banking had not developed, they were the main source of finance for agriculturists, traders, businessmen, small industrialists, etc.

After nationalisation of commercial banks and the spread of banking in urban and rural areas, the activities of indigenous bankers have declined,. but their importance has not become less because of the difficulties still faced by the borrowers in getting loans from the banks.

The borrowers approach them directly and informally and get loans promptly and easily. They do not have any fixed banking hours and do not enter into formalities and procedures followed by commercial banks in advancing loans. That is why they are still popular with traders, businessmen, agriculturists, and ordinary people. They give loans mostly for productive purposes to meet the immediate and short-term needs of the borrowers.

Indigenous bankers provide finance and remittance facilities to traders and small industrialists by advancing loans; writing, buying and selling hundis; writing finance bills and trade bills. Thus they help not only in financing internal trade but also in expanding it. In particular, they help in the movement of agricultural products from rural areas to markets, and of industrial products to different parts of the country.

Those indigenous bankers who combine banking with trading and agriculture help the farmers by lifting their produce from the farms, paying them in cash on the spot, and also giving them loans.

The indigenous bankers act as commission agents when they purchase agricultural products on behalf of firms, mills, and trading houses. In this way, they again help in the development of internal trade.

The importance of indigenous bankers has increased further with the development of capital market in India. They now provide long-term credit to companies by subscribing to their shares and debentures.

The indigenous bankers perform a number of banking and non-banking functions which are explained as under:

(i) Accepting Deposits: The indigenous bankers accept deposits from the public which are of current account and for a fixed period. Higher interest rate is paid on fixed account than on current account. Entries relating to deposits received, amount withdrawn and interest paid are made in the pass-books issued to the clients. The indigenous bankers also get funds from the commercial banks, friends, relatives and even from each other.

(ii) Advancing Loans: The indigenous bankers advance loans against security of land, jewellery, crops, goods, etc. Loans are given to known parties on the basis of the promissory notes. Loans given on the security of land and buildings are based on mortgages registered with the Registrar of the area.

(iii) Discounting Hundis: Discounting of hundis is an important function of indigenous bankers. They write, buy and sell hundis which are bills of exchange.

Hundis are of two types:

(a) Darshni or sight hundi which is payable on demand. and 

(b) Muddati or time hundi which is payable after the period mentioned on the face of the hundi.

(iv) Remittance Facilities: The indigenous bankers also provide remittance facilities to their clients. This is done by writing a finance bill to their branches, if they have at other place, or to some other indigenous banker, with whom they have such arrangements.

(v) Financing Inland Trade: They finance both wholesale and retail traders within the country and thus help in buying, selling, and movement of goods to different trading centres.

(vi) Speculative Activities: They indulge in speculation of food and non-food crops, and other articles of consumption.

(vii) Commission Agents: They act as commission agents to firms. 

(viii) Run Firms: Some of the non-professional indigenous bankers run their own manufacturing processing or service firms, and on the strength of that they provide expertise and working capital to small industrialists.

(ix) Subscribe to Shares and Debentures: They provide long-term finance by subscribing to the shares and debentures of large companies.

10. Write some Suggestions to Reform Indigenous Banking. What are the Defects of Indigenous Banking?

Ans: From time to time suggestions have been made to reform the working of indigenous bankers by certain committees, commissions, and organizations, such as the Indian Central Banking Enquiry Committee, 1931, the Banking Commission, 1971, etc.

We summaries these suggestions as under:

(a) The indigenous bankers should do only banking business and not any other activity.

(b) They should maintain proper account books in a prescribed and recognised form and get them audited.

(c) They should be registered with the, Reserve Bank of India and licence should be issued to them.

(d) For this purpose, every indigenous banker should have a minimum capital requirement.

(e) The indigenous bankers should be linked with commercial banks and their hundis should be discounted by commercial banks like other bills of exchange.

(f) The indigenous bankers registered with the RBI should be provided remittance facilities by all commercial banks.

(g) They should also be allowed to collect cheques, drafts, etc. like other banks.

(h) The indigenous bankers should form an association at all India level and become its members.

(i) They should develop the hundi in a proper format duly approved, by the RBI so that it may be accepted like other bills by the commercial banks.

(j) They should be encouraged to develop the business of bill-broking like the bill-brokers of the London Money Markets.

(k) The benefit of the Bankers’ Book Evidence Act should also be extended to the indigenous bankers.

These suggestions have failed to elicit any response from the indigenous bankers who are not prepared to give up their non-banking functions, to publish their audited accounts, and to register themselves with the RBI. The Reserve Bank of India is also not prepared to relax its conditions and provide facilities to them like commercial banks. The best course is to link the indigenous bankers with commercial banks, as suggested by the Banking Commission. The Reserve Bank of India should lay down guidelines for this purpose.

The following defects are associated with the majority of indigenous bankers:

(a) They are a hindrance in the development of an organised money market in India. The Reserve Bank of India has no control over them. 

(b) They follow old methods of business which are based on secrecy of accounts and activities. Accounts are mostly maintained in vernacular. They are neither audited nor published.

(c) They also provide loans for unproductive purposes.

(d) They combine banking with other activities which bring them more profits such as speculation, trading brokerage, etc.

(e) They charge very high rates of interest.

(f) They also indulge in some undesirable practices, such as manipulating accounts, deducting interest in advance, non-issue of receipts for payment of interest and principal, etc.

(g) They are unorganised except at a few places like Mumbai and Kolkata. This has hindered the mobility of funds.

(h) They do not work in cooperation with the commercial and cooperative banks. This has kept a dichotomy in the Indian money market. 

(i) They are unable to mobilize savings because they prefer giving loans than accepting deposits.

(j) Except in big towns, they have failed to develop the hundi (bill market) in trade and business. They do business in cash.

(k) They are not able to meet the financial needs of borrowers because they operate with insufficient capital.

11. How Can a Bank Achieve Liquidity? Explain the factors affecting the liquidity of a bank.

Ans: Large banking groups engage themselves in substantial capital markets businesses and they have considerable added complexity in their liquidity requirements. This is done to support repo businesses, derivatives transactions, prime brokerage, and other activities.

Banks can achieve liquidity in multiple ways. Each of these methods ordinarily has a cost, comprising of –

(i) Shorten asset maturities: This can assist in two fundamental ways. The first way states that, if the maturity of some assets is shortened to an extent that they mature during the duration of a cash crunch, then there is a direct benefit. The second way states that, shorter maturity assets are basically more liquid.

(ii) Improve the average liquidity of assets: Assets that will mature over the time horizon of an actual or possible cash crunch can still be crucial providers of liquidity, if they can be sold in a timely manner without any redundant loss. Banks can raise asset liquidity in many ways.

Typically, securities are more liquid than loans and other assets, even though some large loans are now framed to be comparatively easy to sell on the wholesale markets. Thus, it is an element of degree and not an absolute statement. Mostly shorter maturity assets are more liquid than longer ones. Securities issued in large volume and by large enterprises have greater liquidity, because they do more creditworthy securities.

(iii) Lengthen liability maturities: The longer duration of a liability, the less it is expected that it will mature while a bank is still in a cash crunch.

(iv) Issue more equity: Common stocks are barely equivalent to an agreement with a perpetual maturity, with the combined benefit that no interest or similar periodic payments have to be made.

(v) Reduce contingent commitments: Cutting back the amount of lines of credit and other contingent commitments to pay out cash in the future. It limits the potential outflow thus reconstructing the balance of sources and uses of cash.

(vi) Obtain liquidity protection: A bank can scale another bank or an insurer, or in some cases a central bank, to guarantee the connection of cash in the future, if required. For example, a bank may pay for a line of credit from another bank. In some countries, banks have assets propositioned with their central bank that can further be passed down as collateral to hire cash in a crisis.

All the above mentioned techniques used to achieve liquidity have a net cost in normal times. Basically, financial markets have an upward sloping yield curve, stating that interest rates are higher for long-term securities than they are for short-term ones.

This is so mostly the case that such a curve is referred as normal yield curve and the exceptional periods are known as inverse yield curves. When the yield curve has a top oriented slope, contracting asset maturities decreases investment income while extending liability maturities raises interest expense. In the same way, more liquid instruments have lower yields, else equal, minimizing investment income.

The following factors are affecting the liquidity of a bank: 

(i) Necessary Cash Reserve: The banks are required to maintain a minimum cash reserve by banking law and the instruction of the Central Bank. If the minimum reserve is high, the banks have to keep higher liquidity, and if the minimum reserve is low, the banks will have lesser liquidity.

(ii) Banking Habits: Banking habits of the people also influence the liquidity requirements of the bank. If the people make or receive payments through cheques, then the use of cash in transactions is reduced to some extent and the banks need to keep lesser amount of liquid cash.

(iii) Banking Structure: The banking structure of a country also determines the liquidity requirements of the banks. Generally, in a unit banking system, higher liquidity is to be maintained by the banks because of small-scale operations of each independent bank, on the other hand, in a branch banking system, the bank can function with less cash reserves, because in case of need, cash can be transferred from one branch to the other.

(iv) Nature of Money Market: Nature of money market also determines the cash requirements of the banks. In a developed money market, banks can function with lesser amount of cash, because banks can buy and sell short-term securities very easily, but in a less developed money market, banks have to maintain greater liquidity because of less scope of buying and selling of securities in the money market.

(v) Nature of Business Conditions: Liquidity position of banks also determines the nature of business conditions. During inflationary stage, business flourishes and a small amount of cash in sufficient to support large deposits. But, during depression business become dull and the businessman do not borrow as they become pessimistic and as a result greater amount of cash is left with the bank.

(vi) Nature of Economy: Nature of economy also greatly influence the liquidity position of the banks. In a developed economy banks need less cash resources as most of the payments are made through cheque. But, in an underdeveloped economy transactions, are general performed through money and more amount of liquidity is needed.

(vii) Seasonal Requirements: During busy season, such as, Diwali, Christmas etc. banks have to keep large amount if cash to meet increased demand of the people.

(viii) Different Types of Depositors: If the deposits are by individuals and are personal nature, the bank can operate with less liquid cash but if the majority of deposits are owned by business firms, the banks will have to maintain high liquidity.

(ix) Clearing House Facility: Cash reserves of the bank also depend on the availability of clearing facility. If there is a clearing house, then the inter-bank claims can be easily settled and banks need not keep large cash reserves, but in the absence of clearing house facility banks require higher liquidity as there is no scope for inter-bank settlement of claims.

12. What are the principles of sound lending of commercial bank. Explain about the structural representation of the capital of a commercial bank.

Or

What considerations guide the commercial banks in managing its assets and liabilities? Explain about the structural representation of the capital of a commercial bank.

Or

Suggestion for sound investment policy of Indian commercial banks. Explain about the structural representation of the capital of a commercial bank.

Ans: The prime motive of a commercial bank is to earn profit. Even in countries where commercial banks are owned by Government, due emphasis is given to maintenance of profitability of banks so as to prevent emergence of sick banks. Commercial banks have to deal with other people’s money. So, the commercial banks have to maintain adequate liquidity of its funds. It should be remembered that more liquidity means less of profitability. So, a commercial bank has to perform the difficult task of maintaining an equilibrium between liquidity and profitability. Being the custodian of the depositor’s money. The commercial bank must also see that the security of investment is not sacrificed at the alter of profitability. So a banker has to choose such a policy, so that he can employ the bank funds in a profitable way.

Bankers generally follows the following important principles of sound lending which are discussed below:

(i) Safety: Safety is the first guiding principle of a banker. The capacity of a commercial bank to repay money to its depositors depends to a great extend upon its borrower’s repaying capacity. So, a banker has to be very careful regarding four C’s of the customers while employing funds. Cs indicate, characters, capacity, capital and collateral character denotes borrowers’ willingness to repay the money, capacity denotes the ability of the borrower to manage the business. Capital denotes the financial soundness or credit worthiness of the borrower and collateral means the security which the borrower can offer. So, the principle of safety is very important factors has to be considered-by a banker at the time of employment of his bank funds.

(ii) Liquidity: Secondly, the banker while making advances must see that the money is lending is not going to be locked up for a long time, which should make his loans and advances less liquid and more difficult to realise in cases of emergency. Commercial banks, therefore, keep sufficient cash in their own vaults as well as with the Central Bank of the country from where they can draw if the necessity arises.

(iii) Diversification of Risks: An efficient banker generally prefers several projects instead of a single project while going to employ his bank funds. Because he knows that if he invest his bank funds to a single project and if the project fails, then it will be very difficult to recover the amount from the said project. So instead of preferring one project he generally prefers several project to employ the bank funds. Because of his practical experience he knows that all the projects will not fail and he will be able to recover at least some among from the remaining projects. So, he diversify the risks, by employing funds to several projects instead of a single project.

(iv) Marketability: A banker has to make a survey in the market to know the exact, demand of the goods upon which he is going to invest funds. So, he appoints a surveyor to make a survey to know the actual position of the market. So, the banker must make sure, that the goods in which he invest his funds are easily saleable.

(v) Profitability: A commercial bank like any other commercial enterprise must strive to earn profit. Profitability is extremely essential to maintain the viability of the banker institution as a credit institution.

(vi) Social good: Banks are not only considered as business institutions, but also institutions at the service of the people. They are expected to make effective use of saving for promoting maximum social good. This implies that commercial banks have got to understand that their performance will be judged not merely in terms of their profitability but also their contribution in the economic development of the country as per national priorities.

(vii) Local conditions: The local condition in which the bank, performs its functions will necessarily have a bearing in managing its assets and liabilities. The nature and availability of funds also differ from country to country and from regions to regions within the same country. In the rural areas of our country, the demand for loans is generally less liquid and less diversified as the main occupation of the people, in our country is agriculture.

The following are the structural representation of the capital of a commercial bank as per various schedule:

Liabilities:

(i) Capital (Schedule):

This represent the following:

(a) Nationalized Banks: Capital owned by the Central Government. 

(b) Foreign Banks: The amount brought by bank by way of start up capital as prescribed by Reserve Bank of India and the amount of deposit kept with the Reserve Bank as per the provisions of the Banking Regulation Act 1949.

(c) Other Banks: The amount contributed by the shareholders of the bank.

(ii) Reserve and Surplus (Schedule 2):

This comprises the following:

(a) Statutory Reserve: According to Sec 17 of the Banking Regulation Act, 1949 every banking company is required to transfer at least 20% of its profits each year prior to declaration if dividend to the Reserve Fund. Such a reserve is termed as statutory reserve.

(b) Capital Reserve: The reserve created out of capital profits. 

(c) Share Premium: Premium received by a banking company on issue of share capital.

(d) Revenue and other Reserves: This item includes all reserves other than those classified as capital reserve. They include dividend equalisation reserve, debenture, redemption reserve, contingency reserve.

(iii) Deposits (Schedule 3): Deposits are a major source for the funds of a banking company.

(iv) Borrowing (Schedule 4): A banking company may borrow from other institutions. These borrowings are generally for short-term and to meet the urgent needs of funds.

(v) Other Liabilities (Schedule 5): These include the following: 

(a) Bills Payable Bills payable represent letters of credit or bank drafts issued by the bank in favor of third parties, for their customers in lieu of the funds received from them.

(b) Inter Office Adjustments (Net): Inter Office Adjustments represent the debts on account of incomplete recording of transactions between branches or between one branch and the head office.

It may be either debit or credit balance. In case of a credit balance, it should be shown under this head. It is to be noted that only net portion is to be shown of inter-office accounts, inland as well as foreign. 

(c) Interest accused: It includes interest accused, but not due on deposits and borrowings.

(d) Others: This includes a provision for income tax and other taxes such as, interest tax, surplus provisions for bad debts, proposed dividends, staff security deposits etc. 

(e) Balance of Profits: This includes balance of profit after appropriations. If there is a loss, the balance may be shown as a deduction assets.

(vi) Cash in hand and with Reserve Bank (Schedule 6): 

This includes the following:

(a) Cash balance maintained by a bank with itself: This balance is maintained by the bank to meet any demand on its funds by its customers. The amount remains idle and it becomes a non-earning asset for the bank. 

(b) Cash with Reserve Bank: It refers to the cash balance maintained by a commercial bank with the Central Bank of the country. 

(vii) Balance with other banks and money at call and short notice (Schedule 7):

(a) Balance with other banks: The banks keep money deposited with other banks besides the Central Bank. This money can be drawn by the banks as and when the need arises.

(b) Money at call and short Notice: It represents the loans given by one bank to another for a short period. Call loans are repayable at any time the banker recalls them while short advances are repayable within a short notice.

(viii) Investments (schedule 8): Investments include securities of the Central and State Governments, shares debentures, or bonds, gold etc. It enables the banks to earn higher income as compared to money at call or short notice besides maintaining their liquidity position.

(ix) Advances (Schedule 9): A major portion of bank’s funds is utilised for this purpose and this is also a major source of a bank’s income. Advances are generally the following types:

(a) Loans, cash credit and overdrafts.

(b) Bills discounted and purchased.

Advances are generally secured as well as unsecured. Though in both the cases, banks give emphasis on the credit worthiness of the borrower, but bankers are more careful about unsecured advances.

(x) Fixed Assets (Schedule 10): Fixed Assets comprise of premises furniture, and other assets which are meant for use in the business and for converting into cash.

(xi) Other Assets (Schedule 11): These comprises of inter-office adjustments (Net), tax paid in advances etc.

(xii) Contingent Liabilities (Schedule 12): These are those liabilities which may not happen. So, these are shown outside the balance sheet.

They are:

(a) Claims against the Bank not acknowledged as debts.

(b) Liability for party paid investments.

(c) Liability on account of outstanding forward exchange contracts. 

(d) Guarantees given on behalf of constituents-

(i) In India.

(ii) Outside India.

(e) Acceptance, endorsements and other obligations.

(f) Other items for which the bank is contingently liable.

13. What were the directions of the Government to the banks regarding the advances to agriculture and small-scale industries. 

Ans: While imposing social control on banks, the Government directed banks to start granting advances to agriculture on a big scale. The National. Credit connate set out different categories of agricultural advances, which the banks are required to grant. These are direct finances and indirect finances.

The former are:

(i) Development loans to plantations of coffee, tea, rubber, spices, and short-term and development loans to other plantations like bananas, cashew nuts, coconuts, lemon grass oil etc.

(ii) Direct credit to the farmers for purchase of: 

(a) agricultural inputs, like fertilizers, pesticides, insecticides, fungicides, improved seeds etc.

(b) implements like trou-plows, hose, sprayers, crushers etc. 

(c) farm machinery like tractors, drillers, tellers etc. 

(d) trucks, carts and other transports.

(e) farm animals like cows, bullocks, buffaloes, poultry, birds, pig etc.

(iii) Direct credit for development of irrigation and water supply like construction of wells, tanks, purchase of pumps and engines etc. 

(iv) Credit for reclamation and land development schemes like building of farm lands levelling farm drainage, reclamation soil and ravine lands, purchase of bulldozers etc.

(v) Credit for construction of farm buildings and structures like bullock sheds, tractor sheds, farm stores etc. as also storage houses, godowns, cold storages.

(vi) Credit for production of processing of hybrids seeds. 

(vii) Credit for payment of charges for hired water, maintenance of engines and equipments service charges etc.

(viii) Credit for development of dairying, animal husbandry, fisheries, poultry, bee-keeping etc.

(ix) Credit for development of stud farms, sericulture and production and distribution of improved seeds.

The categories of indirect finances are mainly:

(a) Hire purchase finances for agricultural machinery and implements.

(b) Loans to Electricity Boards for reimbursing the expenditure incurred by them for providing electricity to farmers.

(c) Loans for construction of storage facilities.

(d) Loans to individuals or institutions undertaking spraying operations. 

(e) loans to co-operative marketing societies and co-operative banks of producers, Agro-Industries Corporation, Stall Sponsored Agricultural Credit Corporations, Agricultural Finance Corporation Ltd.

Short-term finance to small-scale industries is generally provided by the State Bank of India and the commercial banks and the banks have extended their credit to these sectors of the industry in line with the directions issued by the Reserve Bank from time to time.

Small-scale industries are assigned an important place in the plans. A special organisation of small-scale industries was set up to advise Government on the schemes of development of small industries under a development commissioner. Under this organisation are set up Small Industries Service Institute in each state and Several Extension centres all over the country, which provide industrial extension services to small entrepreneurs and help them mainly the improvement of their products and the management of their concerns. Government has also set up small scale industries boards. There are state small scale/industries boards to implement Government Policies. They undertake distribution of raw-materials, supply of machinery on hire-purchase, procure orders from Government and provide technical and commercial assistance.

14. What are the advantages and drawbacks of the securities against which a banker advances loans?

Ans: A banker generally prefers to advances loans against the following securities because of under mentioned reasons: 

(i) Tangible Security: Such securities are better than guarantees and bills of exchange, because they enable the banker to fall back upon something tangible, in case of the failure of customers borrowing against such securities. When an advance is ordinarily secured by a guarantee, the personal security of the borrower is coupled with that of another person, called surety. In case both the parties – the principal debtor and his guarantor fail, the banker’s claim ranks only equity with the claims of other unsecured creditors of the bankrupt customers. It should also be noted that a banker making an advance against goods and documents of title to goods. Is, in case of the failure of the debtor, generally able to recover the amount due to him by selling the goods while for the balance, if any, be can prove his claim against the estate of the debtor.

(ii) Freedom from Heavy Fluctuations in Prices: The second advantage in favour of securities of this kind is that, if the produce and goods advanced against are necessaries of life, their prices in normal times are not liable to wide fluctuations as they have a world wide market. Prices of necessaries of life as wheat, cotton, sugar etc. Unlike those of certain kinds of shares do not fluctuate very widely because they are more or less governed by international conditions.

(iii) Easy to sell: The third point in favour of securities of this kind is that they can be sold more easily than certain types of securities such as lands, buildings, etc. Particularly if the commodities pledged are foodstuff like rice, wheat, or sugar. The banker has practically no difficulty in realising them. In case of immovable property the sale and the transfer of the property may take months, even if the banker is willing to accept less than its fair price.

(iv) Advantages only for short periods: The fourth advantage in favour of these sécurities is that advances against them are generally seasonal and consequently for short-periods, therefore, the banker is lending funds against them, has not to lock up his money for any considerable length of time, whereas, in the case of advances against immovable property, the investment is usually for a long period.

(v) Easy to Evaluate: Lastly, the price of product and goods can be more easily and accurately ascertained than the prices of immovable properties and certain other types of securities. A banker can keep himself in touch with the markets in staple commodities by getting reports from commodity brokers, as well as by studying the market reports published in the daily newspapers.

The addition to the above mentioned advantages, from the point of view of the banker, an important point in favour of such securities is that they help the commerce of the country and enable the people to get food clothing and other necessaries of life for more easily and cheaply than would otherwise be the case.

If a merchant has to restrict his purchase to the extent of his capital, not only will he have to forgo the advantage of lower prices but also he will be unable to keep sufficient stock or variety of goods of his customers. Who, in the turn, will have a restricted field for making purchases and at comparatively higher prices. This is one of the main reasons why bankers should accept such securities.

Drawbacks:

As against the above advantages these securities suffer from the following drawbacks:

Risk of Deterioration: Most of the goods are liable to deterioration and damage unless storage arrangements are quite satisfactory. For example, a banker advancing money against fruits, oil manstories vegetables etc. has to be very careful in seeing that they are sold before they decay. Similarly, while accepting maize as security, he should not forget that it “sweats” more freely than other kinds of produce. Even wheat, it stored for more than six months, is likely to be damaged by white ants, cotton changes colour and jaggery melts in the monsoon season.

Fall in Prices: Certain kinds of goods are liable to wide fluctuations in demand as their market may depend upon fashion and a cheque in fashion may lead to a considerable reduction in demand. Reduced demand, without a corresponding reduction in supply is bound to bring about a fall in prices which will spell ruin to a holder who holds large stocks of such goods.

Greater risks of fraud: There are greater risks of fraud both as regards the quantity as well as the quality of pledged produce than in the case of certain other kinds of securities. Absence of proper standardisation in the quality of goods – specially in the case of agricultural produce such as grains, oil seeds, tobacco, etc. gives additional scope for some unscrupulous people for adulteration.

Storage and verification: Storage of goods and produce entail certain risk not only about their deterioration but also about their verification which kept in godowns on account of the want of licensed warehouses and more particularly because of the parcity of honest and diligent godown keepers.

15. What role played by the private sector banks prior to nationalization?

Ans: In India, modern commercial banking of the western type first arose in the ninetieth century with the setting up of the first Presidency Bank, the Bank of Bengal, in Calcutta in 1806. Initially, the private sector took all interest in establishing the banking institutions with a view to catering to the financial needs of trade and industry. In that era, mostly joint-stock banks were established important banks like the Bank of India, the Central Bank of India, the Bank of Baroda, the Canara Bank etc. came into existence in the first decade of the twentieth century.

During the period of independence, India had a very weak banking structure comprising 96 scheduled commercial banks and 544 non-scheduled banks.

Upto July 1969, all commercial banks, (except State Bank of India and its subsidiaries) were under the control of the private sector.

In June 1969, in all there were 73 scheduled banks (include 15 foreign banks) and 16 non-scheduled banks. These banks were criticised for having manipulated their position to concentrate economic power in a few hands and neglecting the priority sectors like agriculture and small-scale industries. So, on July 19, 1969, fourteen large commercial banks with deposits of over 50 crores were taken over by the Government.

As a result of nationalisation of major banks in the country. 85 percent of the banking came into the public sector and only 15 percent remained in the private sector.

In April 1980, another six commercial banks were nationalized, thereby increasing the share of public sector banks to 91 percent of total deposits.

So, private sector played a strategic in the growth of joint-stock banks in India. During the first half of the twentieth century, there was tremendous growth of the private sector commercial banks. Thus, in 1951, there were in all 566 private sector banks of which 474 were non-scheduled and 92 were scheduled, but there was not a single public sector commercial bank at that time. So, after four years in 1955, the Government of India, entered the banking business with the establishment of the State Bank of India as the first public sector commercial bank.

The position of the private sector banks during the period from 1960 to 1969 are shown in the following table:

Private Sector Banks and its Position from 1960 to 1969

The position of the public sector banks during the period from 1960 to 1969 are shown in the following table:

Public Sector Banks, and its position from 1960 to 1969

So, from the above table, it can be said that in the field of banking, the private sector occupied a prominent place. But the picture has gradually changed after the nationalization of commercial bank in the country. The role of public sector banking was further elaborated when six more private sector banks with deposits of over Rs. 200 crores were nationalized on April 15, 1980.

16. Write short notes:

(i)  SLR .

Ans: Statutory liquidity ratio refers to the amount that the commercial banks require to maintain in the form of gold or government approved securities before providing credit to the customers.  Statutory Liquidity Ratio is determined and maintained by the Reserve Bank of India in order to control the expansion of bank credit. It is determined as % of total demand and time liabilities. Time Liabilities refer to the liabilities, which the commercial banks are liable to pay to the customers after a certain period mutually agreed upon and demand liabilities are such deposits of the customers which are payable on demand. The maximum limit of SLR is 40% and minimum limit of SLR is 23% In India. If any Indian bank fails to maintain the required level of Statutory Liquidity Ratio, then it becomes liable to pay penalty to Reserve Bank of India. The defaulter bank pays penal interest at the rate of 3% per annum above the Bank Rate, on the shortfall amount for that particular day. But, according to the circular, released by the Department of Banking Operations and Development, Reserve Bank of India; if the defaulter bank continues to default on the next working day, then the rate of penal interest can be increased to 5% per annum above the Bank Rate.

(ii) CRR.

Ans: Cash Reserve Ratio, is the percentage of a bank’s total deposits that it needs to maintain as liquid cash. This is an RBI requirement, and the cash reserve is with the RBI. A bank does not earn interest on this liquid cash maintained with the RBI and neither can it use this for investing and lending purposes.Cash Reserve Ratio (CRR) is the percentage of money, which a bank has to keep with RBI in the form of cash. Whereas, Statutory Liquidity Ratio (SLR) is the proportion of liquid assets to time and demand liabilities.The Cash Reserve Ratio (CRR) is a monetary policy tool used by the Reserve Bank of India (RBI) to regulate commercial banks’ liquidity and lending capacity. CRR refers to the portion of a bank’s total deposits that it must maintain with the central bank in cash reserves. It is a percentage of the bank’s net demand and time liabilities.

(a) Under the Reserve Bank of India Act of 1934, The Reserve Bank of India can set the Cash Reserve Ratio (CRR).

(b) The amount of the cash reserve ratio can be transmitted to the Reserve Bank of India, but it must be kept as a reserve in the commercial bank’s vault and can take the form of cash or anything that can be used to replace cash.

(c) The monetary policy committee  of The Reserve Bank of India, which typically meets every two months, decides the percentage of cash reserve ratio that each commercial bank must maintain.

(iii) Overdraft.

Ans: An overdraft occurs when you don’t have enough money in your account to cover a transaction, but the bank pays the transaction anyway. Many banks and credit unions offer overdraft protection programs in which the bank or credit union generally pays the transaction and charges you a fee (in addition to requiring repayment of the overdraft amount). Overdrafts can also be covered through a transfer of funds from a linked account, credit card, or line of credit.An overdraft occurs when there isn’t enough money in an account to cover a transaction or withdrawal, but the bank allows the transaction anyway. Essentially, it’s an extension of credit from the financial institution that is granted when an account reaches zero. The overdraft allows the account holder to continue withdrawing money even when the account has no funds in it or has insufficient funds to cover the amount of the withdrawal.

17. Write about the credit deployment of banks during the nationalization period from 1969 to 1980. 

Ans: Banking has an important link among the various economic activities. It plays a direct role in creating the machinery needed for financing developmental activities. It also ensures that the finance is directed into socially desirable channels.

During the post-nationalisation period, there has been a growing functional diversification of credit from the traditional to priority sectors and procurement of food grains.

The banking sector has been entrusted with the responsibility of helping the government in the fulfillment of certain social goals, such as productive employment, growth with equity, alleviation of poverty etc. 

During the period from 1969 to 1980, the commercial banks have made quite an impressive progress in expanding their quantum of credit. The volume of gross bank credit increased from Rs. 36 abja in 1969 to Rs. 1093 abja till 1991.

The banks have also done remarkably well in living up to their social commitments. Banks were busy for promoting maximum social welfare. This indicated that commercial banks got to understand that their activities will be judged not merely in terms of their profitability but also their sincere work in the economic development of the country as per national priorities. So, they have radically changed their pattern of credit deployment over the period.

The following table contains data relating to the allocation of credit by the scheduled commercial banks to various sectors of the economy. 

A radical change in the pattern of bank credit deployment can be noticed from this table:

Sectorial Deployment of Gross Bank Credit (Rs. Abja)

18. Draw a Balance sheet of a Commercial Bank and explain the meaning of main liabilities and assets.

Ans: Balance sheet of a bank. A format of a balance sheet of a Bank shown below:

Balance Sheet of a bank:

Liabilities:

(i) Share Capital.

(ii) Reserves and Surplus.

(iii) Deposits.

(a) Demand deposits.

(b) Time deposits.

(c) Saving deposits.

(iv) Borrowings.

(v) Acceptance and Endorsement of Bills of Exchange.

(vi) Other liabilities.

Assets:

(i) Cash.

(a) Cash in Hand.

(b) Cash with the central Bank.

(c) Cash with different Banks.

(ii) Money at can and short notice. 

(iii) Investments.

(iv) Loans and advances

(v) Other fixed Assets.

The above mentioned items are generally taken into consideration to prepare the balance sheet of a commercial bank.

A brief descriptions of the liabilities these items are given below: 

(a) Share capital: The contribution made by the shareholders to the company is known as the share capital of the company share capital may be in the form of authorized capital, issued capital, subscribed capital and paid up capital.

Authorized capital is the maximum portion of capital of the bank is authorized to raise in the form of shares.

Issued capital is that part of authorized capital which is utilized for public subscriptions in the form of shares.

Subscribed capital is the part of issued capital actually subscribed by the public.

Paid ― up capital is the part of subscribed capital activity paid by the subscribers.

(b) Reserve Fund: Reserve fund is the amount or portion accumulated over the years out of undistributed profits. Generally bank does not distribute all the profits among the shareholders, it keeps certain parts for meeting contingencies purposes.

(c) Deposits: Banks accumulate capital from various types of deposits which is the major part of capital banks get from the public. The various types of deposits are:

(i) Demand Deposits: Under demand deposits, the customer can withdraw money at any time from the bank but no interest is paid to the customer by the bank.

(ii) Time Deposits: Under this deposits the customer can withdraw money after a fixed period of time and on which high rate of interest is paid by the bank.

(iii) Saving deposits: Under this deposits the customer can withdraw. money in a given period of time and bank allows a minimum rate of interest to the customers.

(d) Borrowings: Sometimes, banks have to borrow money from the central bank to meet the increased demand for money and it becomes the liability of the borrower banks.

(e) Acceptance and Endorsement: Bank accept or endorse the bills of exchange on behalf of its customers and ultimately bank becomes liable to pay the amount of the bill on maturity.

(f) Other liabilities: Bank also creates liability by acting as an agent on behalf of its customer Moreover, the profits earned by the bank has to pay the preference share holders from time to time and creates liabilities.

Brief descriptions of the assets side of the balance sheet of the banks are given below:

(i) Cash: Cash is considered as the most liquid asset of the bank but it is a kind of non earning asset. Cash may be divided in to three wings i.e.

(a) Cash (currency and coins) in hand.

(b) Cash kept with the central bank of the country. and

(c) cash kept with other banks.

(ii) Money at call and short notice: It means, bank can recover the loans on demand or at a very short notice such loans are earning as well as highly liquid assets which can be converted into cash very quickly without loss.

(iii) Investments: Banks invest some funds in Profit Yielding assets. Banks generally prefer the government securities as they are very safe and there is certainty of repayment after maturity.

(iv) Loans and Advances: Banks can earn higher profits through loans and advances. Banks Provide Loans and advances to the businessmen through overdraft or by discounting of bills of exchange.

(v) Other fixed Assets Banks assets include, office building, furniture’s etc. But these assets directly don’t contribute to the income of the bank. So these are regarded as a small properties of the assets of the banks.

19. Write a note on Need for Liquidity. Explain the Types of Liquid Assets. 

Ans: We are concerned about bank liquidity levels as banks are important to the financial system. They are inherently sensitive if they do not have enough safety margins. We have witnessed in the past the extreme form of damage that an economy can undergo when credit dries up in a crisis. Capital is arguably the most essential safety buffer. This is because it supports the resources to reclaim from substantial losses of any nature. The closest cause of a bank’s demise is mostly a liquidity issue that makes it impossible to survive a classic “bank run” or, nowadays, a modern equivalent, like an inability to approach the debt markets for new funding. It is completely possible for the economic value of a bank’s assets to be more than enough to wrap up all of its demands and yet for that bank to go bust as its assets are illiquid and its liabilities have short-term maturities. Banks have always been reclining to runs as one of their principle social intentions are to perform maturity transformation, also known as time intermediation. In simple words, they yield demand deposits and other short term funds and lend them back out at longer maturities.

Maturity conversion is useful as households and enterprises often have a strong choice for a substantial degree of liquidity, yet much of the useful activity in the economy needs confirmed funding for multiple years. Banks square this cycle by depending on the fact that households and enterprises seldom take advantage of the liquidity they have acquired.

Deposits are considered sticky. Theoretically, it is possible to withdraw all demand deposits in a single day, yet their average balances show remarkable stability in normal times. Thus, banks can accommodate the funds for longer durations with a fair degree of assurance that the deposits will be readily available or that equivalent deposits can be acquired from others as per requirement, with a raise in deposit rates.

Liquid assets are such assets held by businesses or individuals, which can be converted into cash quickly. It can include cash, marketable securities as well as money market instruments. All such assets are reflected in the balance sheet of the company.

Cash and savings accounts usually retain the highest form of liquidity that may be owned either by businesses or individuals. The following assets can also be liquidated easily –

(i) Cash: The total amount of money, which is accessible, is a form of liquid asset. Cash can be utilised to resolve any existing liabilities. Cash in an account will also be considered as liquid since it can be withdrawn for settling obligations at any time.

(ii) Cash equivalents: Cash equivalents are usually highly liquid investments which have maturity ranging up to only 3 months. It has substantial credit quality and may be immediately used owing to lack of any restriction. Examples of cash equivalent include commercial papers and treasury bills, amongst others.

(iii) Accrued income: The income that one has already earned, but the amount is yet to be deposited in the associated account is accrued income. In such a case, the delayed income is expected to arrive any day, making it a liquid source of funding.

(iv) Stocks: A stock market is categorised to be liquid due to the existence of a high number of buyers and sellers. One can sell off their owned stocks quickly through electronic markets. Thus, according to the demand, an individual or business can convert equity securities into cash quickly.

(v) Government bonds: Governments may raise funds through bonds wherein investors extend a loan to the government by way of a debt instrument in lieu of an interest rate. Investors stand to gain assured returns at periodic intervals. Government bonds are primarily held to be fixed income assets. An investor receives the original investment on the maturity date. However, maturity tenures differ from one bond to another. Similar to stocks, government bonds may be held as an investment or traded in the open market.

(vi) Promissory notes: Promissory notes are primarily signed documents indicating a written promise to pay the specified sum of money to the recipient on a particular date. This financial instrument is a promise to repay a debt to the payee. Such promissory notes act as an alternative source of funding for individuals who do not want to deal with a bank. The financing party may be a corporation as well as an individual, which on mutually agreed terms, carries the note and initiates financing. 

(vii) Accounts receivable: Accounts receivable refer to invoices and bills that a company has already generated for its consumers, but has yet to receive the payments settling such bills. The unpaid balance amounts to being assets for the particular company.

(viii) Marketable securities: Publicly listed companies may issue short term financial instruments linked with debt or equity securities for the purpose of raising funds, which are known as marketable securities. These instruments are primarily used to finance business expansions or other activities. The debt securities are also issued by the government for carrying out public projects or funding public expenditures. Such debt securities may include Treasury Bills.

(ix) Certificate of deposits: Certificate of deposit entitles the holder of such investment product to a lump sum amount, including the principal and the interest accrued on the principal. The certificate of deposit will lead to liquidity in reaching the maturity period. It amounts to a special kind of savings instrument, which freezes the interest rate, term period, principal, and the bank or the credit institution after it is opened.

Liquidation of a certificate of deposits before the maturity period will attract penalty, and the penalty amount usually depends on the term period.

20. What are the Different Methods for Measuring Liquidity? Explain.

Ans: The Different Methods for Measuring Liquidity are:

(i) Market Liquidity: Market liquidity indicates such condition of the market when assets may be purchased or sold off quickly. Such liquidity is particularly evident in the case of real estate or financial market. The conversion of assets into cash across markets is also referred to as liquidity in economics. The market for equities or stocks can be held to be liquid only if the purchase and selling of shares can happen quickly with minimal impact on the price of the shares. The shares that are traded on big stock exchanges are usually found to be liquid.

(ii) Accounting Liquidity: The ease with which a company or an individual is capable of meeting financial obligations, using liquid assets constitutes accounting liquidity. It involves the comparison of the liquid assets held by the company or an individual to that of current liabilities in a financial year. Accounting liquidity may be measured by current ratio and cash ratio.

Current ratio is also referred to as working capital that takes into account the current assets that may be liquidated into cash within a financial year. Current Ratio = Current Assets/Current Liabilities 

On the contrary, cash ratio measures the cash flow that will meet the current liabilities. It is usually an indicator of short-term liquidity. Cash Ratio=Cash (or equivalents) + Investments (short-term) / Current liabilities.

21. What are the Functions of Commercial Bank? Explain. Explain the Investment policy of commercial banks. 

Ans: Following is a brief overview of both primary and secondary functions undertaken by a commercial bank- 

A. Primary Functions:

1. Accepting Deposits: Commercial banks accept deposits from their customers in the form of saving, fixed, and current deposits.

(i) Savings Deposits: Savings deposits allow a customer to credit funds towards their accounts for up to a certain limit. These deposits are preferred by individuals with a fixed income, utilised to create savings over time.

(ii) Fixed Deposits: Fixed deposits come with a predetermined lock-in period. Fixed deposits are also referred to as time deposits as the funds are deposited for a specific time frame.

(iii) Current Deposits: Current deposits allow account holders to deposit and withdraw money whenever necessary. In some cases, current accounts also offer overdrafts until a pre-specified limit to individuals and businesses.

2. Providing Loans: One of the main functions of commercial banks is providing credit to organisations and individuals, and profit from the earned interest. Usually, banks retain a small reserve for their expenses while offering the remaining amount to customers as various types of short and long-term credits. Commercial banks provide both secured and unsecured loans, categories are-

(i) Cash Credit: Commercial Banks and its Functions include extending advances to individuals and organisations against bonds, inventories, and other types of securities. This facility, commonly known as cash credit, provides a more substantial sum when compared to other forms of credits.

(ii) Short-Term Credits: Short-term loans are usually pledged without any security, offering a smaller loan amount and repayment tenor. These are also referred to as personal loans.

3. Credit Creation: A unique function of commercial banks is credit creation. Instead of offering liquid cash, banks create a line of credit and transfer the loan to a business or commercial body all at once.

B. Secondary Functions: The following can be considered as the secondary functions of commercial banks –

1. Providing locker Facilities: Commercial banks provide locker facilities to customers who want to store valuables safely. Locker facilities eliminate the impending risk of theft or loss, which prevail when kept at home.

2. Dealing in Foreign Exchange : Commercial banks help provide foreign exchange to individuals and organisations which export or import goods from overseas. However, only certain banks which have the licence to deal in foreign exchange are eligible for such transactions.

3. Exchange of Securities: Another function of commercial banks is to trade in bonds and securities. Customers can purchase or sell the units from the financial institution itself, which offers more convenience than alternate approaches.

4. Discounting Bills of Exchange: The main function of a commercial bank in today’s date is to discount bills of businesses. Bill discounting is considered as a profitable investment for banks. Bills create a steady flow of funds, while not becoming a risky venture during payment as it is considered as a negotiable instrument. These also do not involve the financial institution in any litigation.

5. Bank as an Agent: Commercial Bank and its Function also requires them to provide finance-related services to customers, fulfilling the role of an agent. These services usually include ―

(i) Acting as an administrator, trustee, or executor of a customer-owned estate.

(ii) Assisting customers with tax returns, tax refunds, and other similar tasks.

(iii) Serving as a platform to pay premiums, repay loan installments, etc.

(iv) Offering a platform for electronic transaction of funds, processing of cheques, drafts, bills, etc.

In compliance of the instructions issued by the Reserve Bank of India, the revised Investment Policy of the Bank will be as under:

(i) Mandatory Investment: In terms of mandatory requirement of Banking Regulation Act, it is compulsory to invest minimum 3% as Cash Reserve Fund (CRR) & 25% as Statutory Liquid Reserve (SLRinvestment in Govt. & other asset will be treated normal. Up to 31.03.2011, SLR will be 15% and from 01.04.2011, it will be necessary to maintain upto 25%.

(ii) Loans & Advances: Bank can invest upto 75% of own funds and upto 70% of total deposits in loans & advances, out of which, after observing the prescribed norms for priority sector & weaker section of the society, remaining portion can be advanced as per Loan Policy of the Bank keeping in view the ceiling of maximum amount of advance to a single person, similar type of business & on similar type of securities to minimize the risk involved.

(iii) Investment with other Citizen Cooperative Banks: Bank will not make any investment with these Banks except undertaking normal transactions in the accounts opened for clearing and transfer of funds purpose.

(iv) Investment in other Banks Bank may invest its surplus funds in any commercial, private & cooperative Banks but if any such bank provides considerably higher rate of interest then its financial position has to be analysed. Investment of the liquid surplus funds from time to time has to be made in such a way that there should not be any difficulty in meeting out the funds requirement for daily clearing adjustment as well as payment of the deposits on due dates of maturity.

(v) Investment in non-SLR Debt Securities: In compliance of the instructions issued by the Reserve Bank of India from time to time and also keeping in view the additional income on investment and safety of surplus funds, investment may be made in Liquid Funds enjoying good market credit rating and also trading in Government Securities. In this connection Board of Directors keeping in view the circumstances prevailing at that time may fix a limit for the purpose, take a decision in the matter of investment and delegate powers to the Managing Director for investment to a certain extent at one time. Investment will be made with the institutions which are enjoying AAA credit rating. Such investment will not exceed 10% of the total deposits of the Bank.

(vi) Investment in other Institutions, Corporations & Companies: Bank will not invest its surplus funds in any other institution, company, corporation etc. whatsoever be the attractive rate of interest.

(vii) Investment in share money of Cooperative institutions: Bank may invest 2% of its personal funds in the share money of the Cooperative Institutions but it will be in accordance of the directives of the Reserve Bank of India.

(viii) Investment in private companies: Bank will not make any investment in private companies or in Shares / Debentures of other institutions other than Cooperative Institutions.

(ix) Investment in Government Securities: “Government Securities” will mean securities issued by the Central & State Governments.

(x) Cash Management: Except in abnormal conditions, cash balance in the Bank will be kept within the fixed limit as excess cash will affect the profitability of the Bank.

(xi) Besides above, day to day asset, liability management should be prepared in such a way that after complying the mandatory requirements, Bank should earn maximum profit.

(xii) No amendments/ modification in the provisions of the sanctioned Investment policy will be made without the Board of Directors. 

(xiii) In the process of investment, in no circumstances provisions of the Reserve Bank of India will be violated.

22. Write a brief note on investment principles of banks. 

Ans: Investments in banks are meant for earning profits. They take the help of the reserves both primary and secondary to meet the liquidity requirements of the bank. This also helps in meeting the credit needs of society. These needs include short term loans that are provided by the bank.However the investment of funds by banks involves borrowed funds and hence their prime concern is the safety of the funds invested. A banker therefore select the securities very carefully and follow the following principles of sound investments:

(i) Safety of principal: Safety of principal is the guarantee given to the principal amount or invested amount by an individual that the amount will remain the same during the life of the investment. The government and semi-government securities are the safest securities because they are guaranteed by the government.

(ii) Price stability: Price stability means our money maintaining its value over time; i.e. it ensures that the same quantity of money buys roughly the same amount of goods and services tomorrow as it does today.The price of security selected by the banker should remain stable. The safety of investments depends on the stability in the prices of securities. 

(iii) Marketability or liquidity: The primary objective of buying securities by the banker is to earn income and at the same time maintain his liquidity position. Thus, the banker should see that the security in which he invests his funds possesses a ready market i.e. they can be sold in the market without loss of time and money.

(iv) Profitability of yield: After ensuring the safety of the principal money invested in securities, the banker should consider the returns from the investments. In other words, the banker should not give undue importance to higher yields at the cost of safety.

(v) Diversification of Investment: The banker should diversify the risk involved in investment by investing in wide variety of securities issued by wide variety of business enterprises belonging to different trade and industry.

(vi) Refinance: To ensure the liquidity of his investments the banker has to see that the security is eligible to obtain refinance from the Central Bank and other refinancing institutions.

(vii) Duration: In addition to the above factor, a banker also considers the duration and denomination of security and its future earnings prospects.