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Introduction to Banking Unit 1 Evolution of Banking
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Evolution of Banking
INTRODUCTION TO BANKING
|(A) VERY SHORT TYPES QUESTION & ANSWERS|
(A) Multiple Choice Questions:
1. We Should Keep Our Savings With banks because-
(a) It is safe.
(b) Earns interest.
(c) Can be withdrawn anytime.
(d) All of above.
Ans: (d) All of above.
2. Bank does not give loan against-
(a) Gold Ornaments.
(b) LIC policy.
(c) Lottery ticket.
Ans: (c) Lottery ticket.
3. Bank having maximum number of branches in India-
(a) Reserve Bank Of India.
(b) State Bank Of India.
(c) Punjab National Bank.
(d) Bank Of Baroda.
Ans: (b) State Bank Of India.
4. 100/- Rupee note is signed by-
(a) Prime Minister.
(b) Finance Minister.
(c) RBI Governor.
(d) None of above.
Ans: (c) RBI Governor.
5. Bank does not provide loans for-
(a) Crop loans.
(b) Education loans.
(c) Home loans.
(d) Drinking & Gambling.
Ans: (d) Drinking & Gambling.
6. Bank Pass Book is-
(a) Issued by Bank.
(b) Contains transaction details of Bank account.
(c) Shows balance in account.
(d) All of above.
Ans: (d) All of above.
7. Banks pays interest on-
(c) Both (a) & (b).
(d) None of above.
Ans: (a) Deposits.
8. Currency notes are issued by-
(c) Public sector banks.
(d) Central Government.
9. Coins are issued by-
(a) Government of India.
(c) Public sector banks.
(d) State Bank of India.
Ans: (a) Government of India.
10. Which bank is known as banker’s bank?
Ans: (a) RBI.
(B) Fill in the Blanks:
1. The bank of Venice was established in _______.
2. The lead bank scheme introduced by the Reserve Bank of India towards the end of _______.
3. The Reserve Bank of India Act was Passes in _______.
4. Scheduled Banks are those banks which are included in the __________ of the R.B.I. Act.
Ans: Second Schedule.
5. The imperial bank of India nationalised in 1955 and renamed as ________.
Ans: State Bank of India.
6. The bank of England was founded in _______.
7. RBI ACT was comes into existence _________.
8. Banking Regulation Act was comes into existence _________.
9. __________ Section of the Negotiable Instruments Act defines a bill of exchange.
Ans: Section 5.
10. ___________ Controls the credits in an economy.
Ans: Central Bank.
11. The word “Bank” has been derived from the Greek word ________.
12. The Banking Regulation Act was Passed in the year ________.
(C) Answer the Following Questions:
1. How many commercial banks are nationalised at present?
Ans: At present there are 19 nationalised banks in India.
2. In which year the first nationalisation of banks took place?
Ans: In 19th July, 1969.
3. When was Lead Bank Scheme introduced?
Ans: In December, 1969.
4. In which year State Bank of India nationalised?
Ans: In July 1st, 1955.
5. Name the three presidency Banks.
Ans: (a) Bank of Bengal.
(b) Bank of Bombay.
(c) Bank of Madras.
6. In which year the Imperial Bank of India was establised?
Ans: In 1921.
7. In which year the first presidency bank was established in India.
8. Who can create credit money?
Ans: Commercial Bank.
9. Who is authorised to issue notes in India?
Ans: Central Bank.
10. Which bank provides long-term credit to agricultural sector?
Ans: Land Development Bank.
11. In which year the presidency Bank were amalgamated?
12. What is the name of the “Central Bank” of India
Ans: Reserve Bank of India.
13. In which year “Central Bank” in India was established?
14. In which year RBI Act was passed?
15. In which year RBI was nationalised?
16. Which bank provides industrial credit?
Ans: Industrial Bank or Investment Bank.
17. Which is the first development bank of India?
Ans: Industrial Finance Corporation of India (IFCI).
18. In which year Export-Import Bank (Exim Bank) was established?
19. Give an example of Regional Rural Bank (RRBs).
Ans: (i) Assam Gramin Vikash Bank, (ii) Lakhimi Gaonlia Bank.
20. In which year RRBs were started?
21. The rate of interest offered by the bank in saving deposit account is higher/ lower than in Fixed Deposit Account. (Choose correct answer).
22. In which year Deposit Insurance Corporation of India was established?
Ans: 1st January 1962.
23. How many commercial banks are nationalised at present?
Ans: At present there are 19 nationalised banks in India.
24. In which year the first nationalisation of banks took place?
Ans: In 19th July, 1969.
25. When was Lead Bank scheme introduced?
Ans: In December, 1969.
26. In which year State Bank of India nationalised?
Ans: In July 1st, 1955.
27. In which year the Imperial Bank of India was established?
Ans: In 1921.
28. What was the previous name of State Bank of India?
Ans: Imperial Bank of India.
29. Accepting Deposits and Lending of Money are _______ functions of the commercial bank. (Fill in the black)
30. In which year the Bank of Bombay was established?
Ans: In 1840.
31. In which year the Imperial Bank of India was nationalised?
Ans: On July 1, 1955.
32. In which year 14 Indian commercial banks were nationalised?
Ans: In July 1969.
33. In which year 6 Indian commercial banks were nationalised?
34. In 1980 how many commercial banks were nationalised?
Ans: 6 banks.
35. Give an example of Public Sector Bank.
Ans: state Bank of India.
36. Name the first bank in the world and its year of establishment.
Ans: Banco di San Giorgio (Est.1406 450 B.C).
37. Which was the first bank established in India? When was established?
Ans: Bank of Hindustan 1770.
SHORT TYPE QUESTION & ANSWERS
1. Define Bank.
Ans: A bank is a financial institution and a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly by loaning or indirectly through capital markets. A bank is the connection between customers that have capital deficits and customers with capital surpluses.
2. What is Bank?
Ans: Bank is an institution that deals in money. Banks accept deposits and make loans and derive a profit from the difference in the interest rates paid and charged, respectively moreover it provides other financial services Section 5(b) of Banking Regulation Act, 1949 (BR Act):
According to BR Act. “Banking means accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise.”
“Banking company” means any company which transacts the business of banking in India. Company means any company as defined in of the Companies Act, 2013 and includes a foreign company within the meaning of that Act.
A banking company is a company, which accepts deposits of money for the purpose of lending or investment from the public which is payable on demand (Savings Bank and Current Accounts) or otherwise (after a period like Fixed Deposits) and with drawable by cheque (Savings Bank and Current Accounts) or otherwise (by other instruments like fixed deposits).
3. What is Public sector bank?
Ans: These are banks where majority stake is held by the Government of India or Reserve Bank of India. Examples of public sector banks are: State Bank of India, Corporation Bank, Bank of Boroda and Dena Bank, etc.
4. What is Private sector bank?
Ans: In case of private sector banks majority of share capital of the bank is held by private individuals. These banks are registered as companies with limited liability. For example: The Jammu and Kashmir Bank Ltd., Bank of Rajasthan Ltd., Development Credit Bank Ltd, Lord Krishna Bank Ltd., Bharat Overseas Bank Ltd., Global Trust Bank, Vysya Bank, etc.
5. What are different types of bank?
Ans: On the basis of specialisation Banks are classified under the following heads:
(a) Central bank.
(b) Commercial Bank.
(c) Exchange Bank.
(d) Regional Rural Bank.
(e) Investment Bank.
(f) Development Bank.
(g) Co-operative Bank.
(h) Agricultural Bank.
(i) Indigenous Bank.
(j) Savings Bank.
(k) Land Development Bank.
(l) Export-Import Bank.
(m) International Bank.
6. What are different types of bank?
Ans: The scheduled commercial banks are those banks which are included in the second schedule of RBI Act 1934 and which carry out the normal business of banking such as accepting deposits, giving out loans and other banking services. The major difference between Scheduled Commercial Banks and Cooperative Banks is their holding Pattern, since cooperatives are registered under the Cooperative Societies Act as cooperative credit institutions.
Scheduled Commercial Banks can be further divided into four groups:
(a) Public Sector Banks: This includes:
(i) SBI & Associates.
(ii) Nationalized Banks.
(b) Other Public Sector Banks:
(i) Private Banks.
(ii) Foreign Banks.
(iii) Regional Rural Banks.
7. What is Non-scheduled bank?
Ans: Non-Scheduled Bank refers to the banks which are not listed in the Second Schedule of Reserve Bank of India. In finer terms, the banks which do not comply with the Provisions specified by the central bank, within the meaning of the Reserve Bank of India Act, 1934, or as per specific functions, etc. or as per the judgement of the RBI, are not able to serve and protect the depositor’s interest, are known as non-scheduled banks. Non-Scheduled Banks are also required to maintain the cash reserve requirement, not with the RBI, but with themselves. These are local area banks.
8. Name two private sector banks in India.
Ans: The two private sector banks are:
(a) Industrial Development Bank of India (IDBI).
(b) Industrial Credit and Investment Corporation of India (ICICI).
9. Name four public sector banks in India.
Ans: The four public sector banks in India are:
(a) Allahabad bank.
(b) Central Bank of India.
(c) Punjab National Bank.
(d) Bank of Boroda.
10. List the constituents of the Indian banking system.
Ans: The constituents of the Indian Banking System can be broadly listed as under:
(a) Commercial Banks:
(i) Public Sector Banks.
(ii) Private Sector Banks.
(iii) Foreign Banks.
(b) Cooperative Banks:
(i) Short term agricultural institutions.
(ii) Long term agricultural credit institutions.
(iii) Non-agricultural credit institutions.
(C) Development Banks:
(i) National Bank for Agriculture and Rural Development. (NABARD).
(ii) Small Industries Development Bank of India (SIDBI).
(iii) EXIM Bank.
(iv) National Housing Bank.
11. Write short note on External organisation of Bank.
Ans: External organisation of a Commercial Bank is formed on the basis of prevailing Banking laws. The structure of external organisation of Commercial Bank may either be Public, Private or Co-operative. Moreover, the organisation may either be sole-proprietorship, partnership or a joint stock company. It may also be established and managed either in the public or private sector.
The commercial banks are generally setup on joint stock company basis. So, setting up of such companies have to comply with the formalities of Indian Companies Act. But with the Passing of Banking Regulation Act 1949, the banks are to follow the rules and regulation included in the Act. Hence, in order to form a bank the entrepreneurs must comply with both the Acts, namely, Indian Companies Act 1956 and the Banking Regulation Act 1949.
12. What is Foreign Bank?
Ans: These banks are registered and have their headquarters in a foreign banks operating in our country are Hong Kong and Shanghai Banking Corporation (HSBC), Citibank, American Express Bank, Standard & Chartered Bank, Grindlay’s Bank, etc. The number of foreign banks operating in our country has increased since the financial sector reforms of 1991.
13. What is Regional Rural Banks (RRBs)?
Ans: RRB are financial institutions in India that are designed to provide banking services in rural areas. They were established under the Regional Rural Banks Act of 1976, with the aim of bringing banking services closer to rural and agricultural communities and promoting rural development. RRBs are structured as scheduled commercial banks and are regulated by the Reserve Bank of India (RBI). They operate in a specific region, generally consisting of districts within a state. Each RRB is sponsored by a commercial bank, which provides necessary support and assistance. RRBs are jointly owned by the Central Government, the State Government, and the sponsoring commercial bank in a specific ratio. The central government holds a 50% stake, the state government holds a 15% stake, and the sponsoring commercial bank holds a 35% stake.
14. What is Local Area Banks?
Ans: Local Area Banks were set up as per a Government of India Scheme announced in August 1996. The intention of the government was to set up new private local banks with jurisdiction over two or three contiguous districts. The objective of establishing the local area banks was to enable to mobilization of the rural savings by local institutions and make them available for investments in local areas. Thus, the overall idea was to bridge the gaps in the credit availability in the rural and semi-urban areas, thereby strengthening the institutional credit mechanism in such areas. Pursuant to announcement of this scheme, RBI received some 227 applications, but most of them were rejected. RBI approved established of only 10 Local Area Banks but out of them only 4 are into existence as of 2015.
15. What is Industrial Finance Corporation of India (IFCI)?
Ans: IFCI’s full form is Industrial Finance Corporation of India, founded as a Statutory Corporation in 1948 to offer medium and lengthy finance to industries. IFCI became a Public Limited Company under the Companies Act of 1956 when the IFC Act was repealed in the year of 1993. IFCI is currently a government-owned corporation, with the Indian government owning 61.02% of the company’s paid-up capital. IFCI is also a recognised Public Financial Institution under Section 2(72) of the Companies Act in 2013 and is registered as a Systemically Important Non-Deposit Taking Non-Banking Finance Company with the Reserve Bank of India (RBI). The IDBI, scheduled banks, insurance sector, cooperative banks are some of the major stakeholders of the IFCI. The authorized capital of the IFCI is 250 crores and the Central Government can increase this as and when they wish to do so.
16. What is the meaning of IDBI?
Ans: IDBI stands for Industrial Development Bank of India. It is an Indian government-owned financial service company, headquartered in Mumbai. It was formerly known Industrial Development Bank of India. It was established in 1964 to provide credit and other financial facilities for the development of Indian industry. Currently, it is one of the largest commercial banks of India which offers personalized banking and financial solutions. In the term of reach, it is 10th largest bank of the world. It has 2912 ATMs, 1602 branches, and 1013 centers (Including 2 overseas centers in Singapore and Beijing). Its vision is to be a highly preferred and reliable bank enhancing value for all stakeholders. As of October 9, 2017, Mr.Mahesh Kumar Jain is the MD and CEO of IDBI was founded in 1964 as a wholly-owned subsidiary of RBI to provide financial and credit facilities for growth in the Indian industry. Its headquarters is in Mumbai. Currently, it is one of the India’s most prominent commercial banks offering financial strategies and personal banking.
17. What is Export and Import Bank of India (EXIM)?
Ans: The Export and Import Bank of India, popularly Known as the EXIM Bank was set up in 1982. It is the principal financial institution in India for foreign and international trade. It was previously a branch of the IDBI, but as the foreign trade sector grew, it was made into an independent body. The main function of the Export and Import Bank of India is to provide financial and other assistance to importers and exporters of the country. And it oversees and coordinates the working of other institutions that work in the import-export sector. The ultimate aim is to promote foreign trade activities in the country. The EXIM Bank(Export-Import Bank of India) is the country’s largest and leading export finance-based institution engaged in integrating the foreign trade and investments with the national economic growth.
18. What is the meaning of Small Industries Development Bank of India (SIDBI)?
Ans: The SIDBI (Small Industries Development Bank of India) is a wholly-owned subsidiary of IDBI (Industrial Development Bank of India), established under the special Act of the special Act of the Parliament 1988 which became operative from April 2, 1990. SIDBI was made responsible for administering Small Industries Development Fund and National Equity Fund that were administered by IDBI before. SIDBI also promotes cleaner production and energy efficiency.
SIDBI helps MSMEs in acquiring the funds they require to grow, market, develop and commercialize their technologies and innovative products. The bank provides several schemes and also offers financial services and products for meeting the individual’s requirement of various businesses.
19. What is National Bank for Agriculture and Rural Development(NABARD)?
Ans: National Bank for Agriculture and Rural Development or NABARD is the main regulatory body in the country’s rural banking system and is established and owned by the government of India. This bank aims to provide and regulate credit to the rural areas, which will be a first step towards enhancing the rural development in the country.
NABARD has been given many responsibilities related to the formulation of policies, planning, and operations in agriculture and financial development. NABARD carries these responsibilities efficiently and works towards promoting and developing main industries in the rural areas like the agricultural industry, cottage industries, other small scale industries, and rural crafts in an effort to create better infrastructure and better employment opportunities for the people living in these regions.
The Government of India established this bank considering all the guidelines of the National Bank for Agriculture and Development Act of 1981. To put it in simple terms, you can say that the National Bank for Agriculture and Rural Development or NABARD is the main and specific bank of the country for agriculture and rural development.
20. What is Industrial Investment Bank of India(IIBI)?
Ans: The full form of IIBI is the Industrial Investment Bank of India. IIBI was an Indian government-run financial investment company that operated form its creation in 1971 until the Indian government closed down in 2012. It was a sort of development bank to restore sick industrial companies in India. A wide variety of products and services have been offered by IIBI, like project asset-backed funding, cash flow, or other short term funding. The IIBI was set up in 1971 under the name of the Industrial Reconstruction Corporation of India Ltd (IRCI) in Kolkata, West Bengal. This entity was further given the status of a bank in 1985 with a view to creating a financial development institution and thus the Industrial Reconstruction Bank of India (IRBI) was born. A full-fledged banking organization was created in March of 1997 and was finally recognized as the Industrial Investment Bank of India (IIBI). Around 2012, the chairman of the bank, O.N. Singh confirmed to the press that the bank would be closing its operations shortly due to mounting debt and unviable functions.
21. Give a brief review of Indian Banking System.
Ans: Banking industry in India has traversed a long path to assume its Present stature. It has undergone a major structural transformation after the nationalization of commercial banks in 1969.
During the last two decades of nationalization, there has been a phenomenal expansion of branch network, particularly in the hither to under banked rural areas. Banking industry in our country has faced lot of hurdles and impediments, stresses and strains, but the dynamic fashion in which the banking industry has taken them in its stride and serged a head only demonstrates its resilience and inherent potentialities as catalytic agent for social economic development. The history of the growth of Indian banking therefore, makes an interesting reading. It covers scope from a small money lender with limited resources and area of operation to a large joint stock bank with huge resources and diversified business activities.
LONG TYPE QUESTION & ANSWERS
1. Discuss the origin and evolution of Bank.
Ans: There seems to be no unanimity amongst the economists, the word ‘Bank.’ According to some economists, the word ‘Bank’ has been derived from the German work ‘BANC’ which means a joint stock firm, while others say that it has been derived from the Italian word ‘BANCO’ which means a heap. At the establishment of Bank of Venice in 1157, the Germans were influential and hence, perhaps the word ‘BANC’ or ‘BANCO’ was used by Italians to denote the accumulation of securities or money with a joint stock firm, which later on known as Bank. It is possible to trace the history of commercial banking to ancient times. The business of Banking is as old as the civilisation itself. As early as 2000 B.C., the Babylonians had developed a System of banks. They used their temples for lending at higher rates of interest against gold and silver which had been left with them for safe custody. The Greek temples were used as depositories for people’s surplus funds and these were the centres of money lending transactions. The Priests of the temples acted as financial agents till they lost Public Confidence on account of people’s disbelief in religion.
Alfred Marshall in his book “Money, credit and commerce” writes that, “in Greece, the temples of Delphi and other safer places acted as store houses for the precious metals before the days of coinage in later times, they lent out money for public and private purposes at interest though they paid none themselves.” In ancient Rome and with the revival of trade and commerce in the middle ages, it became more prominent.
In India, the ancient Hindu scriptures refer to the money lending activities in the vedic period. During the era of Ramayana and Mahabharata, the Banking had become a full-fledged activity. The reference to money lending business are found in the Manu Smriti also.
In the middle age, in Italy the first bank called the ‘Bank of venice was established in 1157.
In England, the bankers of Lombardy had taken the initiative to start modern banking along with their trading activities in London. But the commercial banking began there only after 1640, when gold smiths started receiving deposits from the public for safe custody and issued receipts for the acknowledgement which were being used as bearer demand notes later on.
Crowther speaks about three ancestors of modern commercial bank viz. the merchant, the money lender and the gold smith the merchants or traders issued documents like hundi to remit the funds. Modern banks introduced cheques or demand drafts for remittance purposes. Money lenders gave loans. Bankers also give loans, goldsmiths received deposits and created credit. Bank also received deposits and adopted the process of credit creation by issuing cheques and giving loans. All this goes to show that the banking originated in the distant past.
2. Discuss the growth and evolution of bank in India.
Ans: Our banking system is divided into commercial banks (public and private banks), Regional Rural Banks, Cooperative Banks, etc. One of the key events that marked the evolution of the Indian banking sector is the nationalization of banks. The event made way for the Indian economy to get a global position among the top ten economies in the world.
The advancement in the Indian banking system can be classified into three different phases.
(a) The pre-independence phase i.e., before 1947.
(b) After independence phase, i.e. from 1947 to 1991.
(c) The LPG (1991) era and beyond, i.e. 1991 and beyond.
(a) The Pre-Independence Phase: This phase is categorized by the presence of a considerable number of banks in India. Nearly 600 banks were present in India. The banking system started with the foundation of Bank of Hindustan in the then capital, Calcutta (present-day Kolkata) in 1770. The bank ceased its operations in 1832. Post Bank of Hindustan, many other banks evolved such as the General Bank of India (1786-1791) and Oudh Commercial Bank (1881-1958), but they did not continue their operations for long. Oudh Commercial Bank was the first commercial bank of India.Some banks of the 19th century continue to operate even now establishing themselves as an institution of excellence. For example, Allahabad Bank was established in 1865, and Punjab National Bank was established in 1894. Also, some banks such as Bank of Bengal (est. 1843) were merged into one entity. The new body was called Imperial Bank of India which was later renamed as the State Bank of India. In the year 1935, the Reserve Bank of India was commissioned upon the recommendation of the Hilton Young Commission.
During this phase, due to the failure of the majority of small-sized banks, the confidence of the public was low, and people continued to engage with money lenders and unorganized players.
(b) After independence Phase- 1947 to 1991: One of the main features of the period was the nationalization of bank.
Why was Nationalisation Needed?
(i) The banks primarily catered to large businesses.
(ii) Critical sectors such as agriculture, small-scale industries and exports were lagging.
(iii) The moneylenders exploited masses: Thus, in the year 1949, the Reserve Bank of India was nationalized. In two decades, fourteen commercial banks were nationalised in July 1969 during the reign of Smt. Indira Gandhi. In 1975, based on the recommendation of the Narasimham committee, Regional Rural Banks (RRBs) were constituted with an objective of serving the unserved. The primary goal was to reach masses and promote financial inclusion. Some other specialized banks were also set up to promote the activities that were required for the economy. For example, NABARD was established in 1982 to support agriculture-related work. Similarly, EXIM bank was built in 1982 for export and import. National Housing Bank was set up in 1988 for the Housing sector, and SIDBI was established in 1990 for small-scale industries.
Was Nationalisation Successful?
Nationalization was a significant step in the banking sector, and it helped improve people’s confidence in the system.Small and critical industries started getting access to capital that helped boost economic growth. Additionally, the move added to the country’s growth across the global banking sector.
(c) Third phase- The LPG (1991) Era and Beyond:
1991 saw a remarkable change in the Indian economy.
The government opened up the economy and invited foreign and private investors to invest in India. This move marked the entry of private players in the banking sector.
The RBI provided banking license to ten private entities of which some of the notable ones survived such as ICICI, HDFC, Axis Bank, IndusIand Bank, and DCB.
In 1998, the Narsimham committee again recommended the entry of more private players. Thus, the RBI provided a license to Kotak Mahindra Bank in 2001 and Yes Bank in 2004.
Nearly after a decade, the third round of licensing took place. The RBI in 2013-14, allowed a license for IDFC bank Bandhan Bank.
The story didn’t end here, with an aim to make sure that every Indian gets access to finance, the RBI introduced two new set of banks – Payments bank and small banks, and this marked the fourth phase in the banking industry.
(a) Payments Bank: These banks are allowed to accept a nominal deposit (Rs.1 lakh per currently).
These banks are not allowed to provide credit (both loans and credit cards), but can operate both current account and savings accounts.
Other services include ATM/debit cards, net-banking, and mobile banking. Bharti Airtel started first payments’ bank in India.
Following the six most active payments bank currently:
(i) Aditya Birla Payments Bank.
(ii) Airtel Payments Bank.
(iii) India Post Payments Bank.
(iv) Fino Payments Bank.
(v) Jio Payments Bank.
(vi) Paytm Payments Bank.
(b) Small Finance Bank: These banks are niche banks, with basic banking service, which include acceptance of deposits and lending.
The primary objective is to serve the unserved, such as small business units, small and marginal farmers, micro and small industries, and unorganised sectors.
Following are the small finance bank currently operational in India:
(i) Ujjivan Small Finance Bank.
(ii) Jana Small Finance Bank.
(iii) Equitas Small Finance Bank.
(iv) AU Small Finance Bank.
(v) Capital Small Finance Bank.
(vi) Finance Small Finance Bank.
(vii) ESAF Small Finance Bank.
(viii) North East Small Finance Bank.
(ix) Suryoday Small Finance Bank.
(x) Utkarsh Small Finance Bank.
3. Discuss the various evolutions of banking in India.
Explain the stages in the evolution of banking in India.
Ans: The various evolution of banking in India are as follows:
(a) Banking in India during the ancient period: The business of money lending has been practised in India from time immemorial. There are references in Rig Veda and various Hindu scriptures about the practice of money lending and charging interest thereon. History says that during the era of Ramayana and Mahabharat, the banking had become full-fledge activity. The laws of Manu, the great Hindu jurists also disclose that a simple form of banking was known to the people in India 3000 years back. Even during the 2TM or 3% century A.D., Manu devoted a section of his work on deposits and advances and laid down the rules relating to rates of interest to be paid or charged. The famous Dilwara on Mount Abu is said to have been built by two Jain bankers somewhere between 1197 and 124/ A.D. There are evidences to show that indigenous bankers in India dealt in Hundis from 12” century.
(b) Banking during the Mughal period: During Mugal period, the indigenous banker played a very important role in money lending and financing foreign trade and commerce. The indigenous banker were all engaged in the profitable business of money changing. Every town big or small had ‘Shetip also Known as ‘Shah,’ ‘Shroffs,’ there was a ‘Nagar-Sheth’ or ‘Town Banker’ in principal towns. The “Nagar-Sheth’ transferred funds from place to place through the use of Hundis. These activities were carried on in addition to their normal business activities. Aurangzeb, in his reign conferred the title of ‘Sheth’ on the most eminent banker of his time known as Maneckchand. Emperor Farrukhsiyer conferred on Fatehchand, nephew of Seth Manekchand, the title of ‘Jagat Seth’-the banker of the world. Thus the concept of modern baking has been believed to be evolved from the money-lending concept of Indigenous banker or money lenders.
(c) The development of modern banking: The concept of modern joint stock banking system was developed in the 19 “century in all over the world. The history of modern banking in India goes back to 17 “Century. The earliest banks were known as the agency houses. Important developments in modern banking system in the country can be discussed as follows-
(i) Agency Houses: In the initial years of British rule in India, some special business establishments, Known as agency houses were established by the East India Company to carry on their trading activities. In order to facilitate the settlement of foreign trade transaction, one of the leading agency houses namely the Calcutta Agency Houses have a great bearing in the history of commercial banking in India. However, their banking functions were solely depended upon the deposits, thus, without having any capital of their own. Therefore, almost all such agency houses vanished from the scene in the crisis of 1829-32.
(ii) The Bank of Hindustan: The first Joint-stock bank established along purely European lines, was the Bank of Hindu stan founded in 1770 by M/s Alexander and Company. It was a mere appendage of the agency houses. In 1785 two more joint stock commercial banks, namely the Bank of Bengal and the Central Bank of India were established. All these three banks were into liquidation during the time of financial crisis in 1829-32.
(iii) Establishment of Presidency Banks: The establishment of the Presidency Banks is regarded as the next stage in the evolution of modern banking in the country. The Bank of Bengal is the first Presidency bank, which was established in 1809 by a charter issued by the East India Company. This bank was followed by the establishment of the Bank of Bombay in 1840 and the Bank of Madras in 1843. Collectively, all the three banks were known as Presidency Banks. The association of Presidency banks with the government gave them considerable prestige, which helped them to attract considerable profitable business.
(iv) The Principle of limited liability: In India, the passing of Joint Stock Companies Act, 1850 constitutes another landmark step on the evolution of modern commercial banking. The Presidency Banks were not in a position to cope up with the requirements of growing trading and commercial activities carried out by the agency houses. There were very few banks small in size and operation till the introduction of the principle of limited liability in 1860 to banking companies. The government’s decision to introduce the principle of limited liability had given stimulus in the establishment of commercial banking in India. In the year 1863, a new bank viz. The Bank of Upper India established. This bank was followed by the establishment of two banks viz. the Allahabad Bank and the Alliance Bank of Shimla. Both the banks were established in 1874. Thus, the number of commercial banks in India increased to 14 by the year 1884. Thereafter, The Oudh Commercial Bank, first commercial bank on modern lines was established in 1894. This bank was followed by the establishment of Punjab National Bank in 1893 and people’s Bank in 1901.
(v) Impact of Swadeshi Movement: The advent of Swadeshi Movement in 1905 had a great bearing on the establishment of commercial banks particularly in the Eastern India. A large number of banks came into existence since the advent of Swadeshi Movement. A few of the banks floated during this period include the Bank of India, The Punjab and Sind Bank, The Bank of Mysore, The Bank of Baroda etc. Some of these banks made considerable progress and are operating even today while many banks had also gone into liquidation.
(vi) Formation of the Imperial bank: In 1921, the three presidency banks were amalgamated and a single bank was formed namely the Imperial Bank of India. The legislative measure in this regard was the Imperial Bank of India Act 1920. Although, The Imperial Bank of India (1921) was given the status of government’s bank, but in practice, this bank was the banker to the government in limited sense. This bank was permitted to undertake only the general banking functions of the government but had no power to control currency and had only a partial control on credit. The Bank was not given the power to issue notes but it was allowed to hold Government balances and to manage the public debt. It is to be noted that in 1955, the Imperial Bank of India was nationalised and renamed as the State Bank of India.
(vii) Banking institutions during the time of World War I: During the time of the World War I, there was euphoria in the establishment of commercial bank in India. However, the boom in the establishment of commercial bank was Short-lived. The working of many of the banks set up during this period were so defective that, once the post war boom conditions were over, there was spate of bank failure. The spate of banks failure was further fuelled by the Great Depression during 1929-1933. In addition to the adverse impact of the Great Depression, the partition of the country in 1947 gave another shock to the commercial banking world.
4. Discuss the classification of banks in India.
Ans: The banking institutions form an indispensable part in a modern developing society. They perform varied functions to meet the demands of various sections of the society. On the basis of the functions performed and its ownership, the banks can be classified into the following types:
(a) On the Basis of Functions:
(i) Commercial Bank: Banks, which help for the development of trade and commerce, are called Commercial Banks. The commercial banks may be owned by government or owned by private sector. For e.g.: Canara Bank, Punjab National Bank, Lakshmi Vilas Bank, Karur Visya Bank etc., are called as commercial banks.
(ii) Industrial Bank: These banks assist to promote industrial development by providing medium and longterm loans, underwrites the shares and debentures, assisting in the preparation of project reports, providing technical advice and managerial service to the industries. For e.g.: Industrial Development Bank of India (ICICI), are known as industrial banks.
(iii) Regional Rural Bank: These banks are established in rural areas. Its object is to develop the rural economy by providing credit and other activities for agriculture, trade, commerce, industry and other productive activities in the rural areas.
(iv) Exchange banks deal in foreign exchange and specialise in foreign trade. It plays an important role in promoting international trade. It encourages flow of foreign investments into India and helps in capturing international capital markets.
(v) Central bank: Every country has a central bank its own which is called as central bank. It is the apex bank and the statutory institution in the money market of a country. The central bank occupies a central position in the monetary and banking system of the country and is the superior financial authority. In India, the Reserve Bank of India is the central bank of our country.
(b) On the Basis of Ownership: On the basis of ownership banks can be classified as:
(i) Public Sector Banks: These types of banks are owned and controlled by the government. The nationalisation banks and regional rural banks come under this category.
(ii) Private sector Banks: These Banks are owned by private individuals and corporations.
(iii) Cooperative Banks: These banks are operated on cooperative principles. It is a voluntary association of members for self-help and caters to their financial needs on a mutual basis. These banks are also subject to control and inspection by Reserve Bank of India. The main function of co-operative banking is to link the farmers with the money markets of the country.
(C) On the Basis of Schedules of RBI:
(i) Schedule banks: These types of banks are included in the second schedule of the Reserve bank of India Act 1934. The banks, which fulfill the following conditions, are classified into scheduled banks.
(a) its paid up capital and reserves are atleast Rs. 5 Lakhs.
(b) Its operations are not detrimental to the interest of the depositors.
(C) It is a corporation or co-operative society and not a partnership or a single owner firm.
(ii) Non-Scheduled banks: The banks, which are not covered by the second schedule of Reserve Bank of India, are called as non-Scheduled banks.
5. Write a note on the history and development of banking in India.
Ans: In India, indigenous bankers have existed in the society since very ancient period and have been carrying on their age old banking operations in different areas of the country.
In our country, we have two sectors in the field of banking operations they are:
(a) Organized. and
(b) Unorganised sector.
The activities of the organised sector is Satisfactory as compared to the unorganised sector. The Reserve Bank of India tried to regulate and provide facilities to the indigenous bankers. But, despite its best efforts, the Reserve Bank has not been able to integrate the indigenous bankers with the modern banking system.
So, still in our country, the unorganised sectors have occupied a prominent role mainly in the rural and semi-urban areas. Beside this some loan offices, nidhis and money lenders are found to be very popular in some parts of the country.
The history of development in Indian Banking System can be studied as follows:
(a) Pre-Independence period. and
(b) Post-Independence period.
Pre-Independence history of Indian commercial banking is marked by slower growth and during this period, banking institutions primarily consisted of indigenous banks, money lenders, nidhis, loan offices etc., as mentioned above.
Commercial banking in India mainly began with the establishment of the first joint stock bank known as the Bank of Hindustan. But, this bank was unable to perform its functions due to mismanagement and ultimately the bank failed in 1832.
In, 1806, the Bank of Bengal was established, which was the real beginning of the modern commercial banking in the country. Gradually the Bank of Bombay and Bank of Madras were established in 1840 and 1843 respectively. All these banks were established under the charter of East India Company, known as the Presidency Bank.
In the last part of the 18th century, many English agency houses established the commercial banks on modern pattern.
Again, in the year 1850, the passing of the joint stock companies Act encouraged the companies to establish money commercial banks. In 1863, 25 banks were established in the metropolitan city Bombay, but due to the inefficient management, the banks could not survival.
Again in the year 1881 oudh commercial Bank was established as a Pure Indian bank and it was followed by the setting up both Punjab National Bank and People Bank in 1894 and 1901 respectively.
The great Swadeshi Movement in the year 1905 gave great stimulus to the starting of Indian Banks and many banks were established such as the Bank of India Ltd. in 1960. The Bank of Baroda Ltd. and the Central Bank of India Ltd. in the year 1908 and 1911 respectively. Then came the period of banking crises during the period from 1913-17. and as a result several banks failed. Though the Banking Industry faced a series of crisis and consequent bank failures, the situation changed after independence of the country.
Prior to independence in the year 1921, the Imperial Bank was established in the country by amalgamating. The Presidency bank of Bengal, Bombay and Madras. The Presidency bank of Bengal, Bombay and Madras. The Imperial Bank was nationalised by passing of the state Bank of India Act, 1955 which was brought into force with effect from the 1st July 1955.
Again there was a strong recommendation in the year 1926 from the Hilton young commission for the establishment of a separate central Bank in the country. Ultimately, the introduction of the bill in the Legislative Assembly in the year 1933 resulted in establishment of Reserve Bank of India in April, 1935.
The development of banking system after independence was more impressive. The first step of nationalisation of the Reserve Bank changed in the outlook of the bank as the Central Bank of the country. Again for smooth, efficient and balanced growth of the banking business in the country, the Banking Regulation Act. 1949 was passed.
In the year 1967, the government initiated the scheme of social control over banks for proper allocation of institutional credit over unbanked and under banked areas, and to ensure that the neglected sectors and the small borrowers, who depended on non-institutional finance, also get credit from banks on reasonable terms.
Though social control gave certain directions and guidelines to commercial banks. The multifarious needs of the community became very slow, so, the Government nationalised 14 major commercial banks on July 19, 1969 and after 11 years of 1st phase of bank nationalisation, government nationalised 6 more banks on 31th march 1980.
Nationalised banks were expected to give priority to the scheme of the neglected sectors and exports to meet some the demands of the Public Sector undertaking, and to use the balance of the available sources for organised industries on the basis that new enterprises and those in backward areas will be preferred to the big business houses.
Again in order to expand branch network in all parts of the country, the Lead Bank scheme was introduced. Under this scheme, the lead bank was required to concentrate on the banking business and resources development in the districts assigned to it in collaboration with other development agencies.
6. Describe the different departments of a Bank.
Ans: The various departments of Commercial Banks are:
(i) Secretary Department: It looks after the secretarial works within the department like taking necessary action for organising meetings preparation of agenda etc.
(ii) Law Department: It looks after the matters relating to law. Such as payment of income tax on behalf of shareholders, payment of sales tax etc.
(iii) Accounts Department: The accounts department is responsible for maintaining the accounts books like Profit and Loss, income and expenditure.
(iv) Statistics Department: The statistics department is in charge of keeping statistical report of the various activities of bank. For example Systematic record of performance of various departments that may help in future comparison etc.
(v) Loan Department: Large commercial banks have a loans department which look after the loan related policies. For example, whom to give loan, how to give loan ect.
(vi) Inspection Department: The inspection department looks after the working of the various departments. On the basis of the reports by this department, future plans and programmes are formulated.
(vii) Regional or Branch Manager Department: The main function of the Regional or Branch manager department is to see whether the principle and procedure of the banks are functioning effectively.
(viii) Printing and Publishing Department: The printing and publishing department is to arrange for printing necessary forms. Such as counter file cheques, bank reports etc.
7. Discuss the nature of Bank.
Ans: The Bank is a kind of financial institution. It transacts mainly money, financial papers, credit etc. In this regard its nature is separated from that of other institution. Bank earns profit by transacting money and it exists on the basis of profit. So from this point of view bank is a business institution in nature.
The main business of the Bank is to provide credit for the purpose of earning profit. On the otherhand it accepts deposit from different persons, institutions of the society. The deposited money or collected money are also provided in the field of industry, trade and commercial institution etc. to strengthen economic position of a country. In this regard it takes role both as debtor and creditor.
Bank mobilises the saving habit among the different parts of the society. The savings are invested in different Production as their capital. Bank acts as a mediator in between savers and investors. Profit of bank comes from the difference of interest earned and the same are paid to customers. The notable point is that the bank creates money by innovative techniques. The nature of deposit and credit facilities of Commercial Bank is different from other credit system. The agricultural Bank, Industrial Banks etc. provide long term credit facilities and accept deposit also by the same manner, on the otherhand the major portion of the credit of commercial Bank is different from other credit system. The agricultural Bank, Industrial Banks etc. provide long term credit facilities and accept deposit also by the same manner, on the other hand the major portion of the credit of commercial Banks are provided on short period of time. They cannot provide long term credit facilities because they are bound to meet the customers demand.
The Banking System is an important part of the economy of a country. The economic conditions are influenced by the development of bank and vice-versa.
The Commercial Bank acts as a financial adviser. As an agent of the customer, the bank purchases and sales of shares, debentures etc. of the company and pay salary, pension etc.
8. Explain the features of Bank.
Ans: The features of bank are as follows:
(a) Deals with money: The main features of a bank is that it deals with all the money-related transactions. For example, you can deposit your money in a bank account to save it securely, and you will also get interested in the money that you will save in the account.
(b) Provide loans: Banks make extra money by providing loans for different products to the loan. The bank makes the extra money by lending money to the eligible person at certain rates. Nowadays, banks provide loans for various requirements such as study loan, car loan, home loan, personal loans etc.
(c) Withdrawal and payment facilities: A Bank provides various payment and withdrawal services to customers so that they can receive their money hassle-free. Customers can withdraw money using cheques and drafts and also from the ATMs installed by the banks at different locations in the city. They can withdraw money using the debit cards provided by the card is directly linked with the bank and customers can withdraw money anywhere in the world without going to the bank and even without carrying their passbook.
(d) Internet services: Another feature of a bank is that modern banks are also providing internet services. The development of the internet and its inclusion in the banking sector has made it even more easy for people to carry out various transactions.
(e) Business: The only work of banking is not to provide banking services to customers. All banks are involved in the subsidiary businesses to make more money. Their sole responsibility to provide maximum satisfaction to their customers and to provide them maximum interest rates so that more customers do banking with them. The money is passed from one hand to another to make a profit.
(f) Deposits must be withdrawable: The deposits (other than fixed deposits) made by the public can be withdrawable by cheques, draft or otherwise, i.e., the bank issue and pay cheques. The deposits are usually withdrawable on demand.
(g) Dealing with credit: The banks are the institutions that can create credit i.e., creation of additional money for lending. Thus, “creation of credit’ is the unique feature of banking.
9. Discuss the importance of Bank.
Ans: The importance of bank are as follows:
(i) Collections of Savings and Advancing Loans: Acceptance of deposit and advancing the loans is the basic function of commercial banks On this function, all other functions depend accordingly. Bank operates different types of accounts for its customers.
(ii) Money Transfer: Banks have facilitated the making of payments from one place or persons to another by means of cheques, bill of exchange and drafts, instead of cash. Payment through cheques, the draft is more safe and convenient, especially in case of huge payments, this facility is a great help for traders and businessmen. It really enhances the importance of banks for the business community.
(iii) Encourages Savings: Banks perform an invaluable service by encouraging savings among the people. They induce them to save for profitable investment for themselves and for the national interest. These savings help in capital formation.
(iv) Transfer Savings into Investment: Bank transfer the savings collected from the people into investment and thus increase the amount of effective capital, which helps the process of economic growth.
(v) Overdraft Facilities: The banks allow the overdraft facilities to their trusted customers and thus help them in overcoming temporary financial difficulties.
(vi) Discounting Bill of Exchange: The importance of banks can be seen through the facility of discounting the bill of exchange. Banks discount their bill of exchange of consumers and help them in financial difficulties. By discounting a bill of exchange, they able to get the desired amount for the investment they want.
(vii) Financing Internal & External Trade: Banks help merchants and traders in financing internal and external trade by discounting a foreign bill of exchange, issuing of letters of credit and other guarantees for their customers.
(viii) Act as an Agent: The bank act as an agent and help their customers in the purchase and sales of shares, provision of lockers payment of monthly and dividends on the stock.
10. What are the types of Banks in India? Explain.
Ans: In India, there are many ways, through which banking may be done. To facilitate this, there are different types of banks on the market in India. Below is the list of types of banks in India:
(a) Central Bank: RBI is the central bank in India that governs and regulates the other banks working throughout the country. Central Bank guides the other banks, issue currency, implement the monetary policies and supervise the financial system. It is also called the banker’s bank.
(b) Commercial Bank: Commercial banks were regulated under the Banking Regulation Act, 1949 to operate on a commercial basis and earn a profit. These banks have a unified structure and can be run by any government or private entity and tend to all sectors whether rural or urban.
Types of Commercial Bank are:
(i) Public Sector Banks: In public sector banks, Government or the RBI are the major stake owners. These banks are nationalised and a large part of the Indian banking system revolved around this sector. These nationalised banks cover about 75 percent of the total banking business in India. Indian government holds the majority of its stakes in these banks. The largest bank in the public sector is SBI (State Bank of India). India has now 12 nationalised banks.
(ii) Private Sector Bank: In these banks, private organisation or the group of people owns the stakes. These banks also have to follow the rules and regulations set by RBI.
(iii) Foreign Sector Banks: Some of the foreign banks have branches In India and headquarters abroad. These types of banks are included in this sector. These banks follow the rules and regulations of their country’s central bank as well as RBI. The number of foreign banks in India is more than 40.
(iv) Regional Rural Banks (RRB): These banks work for the agriculture and rural sectors. These Banks were established in 1975 and registered under Regional Rural Bank Act, 1976. The stakes of these banks are owned by the Central bank (50%), State Government (15%), and Commercial Bank (35%).
(c) Co-operative Banks: All those banks which run by an elected managing committee working on no-loss and are registered under the Co-operative Societies Act 1912, are known as Co-operative banks, These banks finance agricultural activities like farming, hatcheries, etc. in rural areas and small businesses, self-employment, and industries in non-rural areas. These banks are divided into three types.
(i) Urban Co-operative Banks: The banks located in semi-urban and urban, which finance small businesses.
(ii) State Co-operative Banks: The bank is an association of central co-operative bank and acts as a protector of the collaborative banking system in the state. Its funds are gained from the overdrafts, social capital, loans, etc.
(iii) Primary Agricultural Credit Society (PACS): A Primary Agricultural Credit Society (PACS) is a basic unit and smallest co-operative credit institutions, which works on the grassroots level (gram panchayat and village level).
(d) Local Area Banks (LAB): These banks were introduced in India in 1996 and registered under the Companies Act 1956. These are organised by the private sector and there are only 4 local area banks in India (South India).
List of Local Area Banks:
(i) Coastal Local Area Bank Ltd.
(ii) Capital Local Area Bank Ltd.
(iii) Krishna Bhima Samruddhi Local Area Bank Ltd.
(iv) Subhadra Local Area Bank Ltd.
(e) Specialised Banks: These banks are established for a specific purpose only.
(i) Small Industries Development Bank of India (SIDBI): These banks are set up to provide loan facilities to small-scale industries and businesses. This bank is also responsible for providing modern technology equipment to small-scale industries.
(ii) EXIM Bank (Export And Import Bank)- EXIM bank is responsible for providing loans or any financial assistance with the export or import of the goods.
(iii) National Bank of Agricultural and Rural Development (NBARD)- This bank is responsible for providing financial assistance to the rural, Handicraft, village, and Agricultural development.
(f) Small Finance Banks: These banks provide loans and financial support to the small farmers, Micro industries, and other unorganised sectors of society. RBI governs these banks also.
(g) Payments Banks: The payment banks are conceptualised by the RBI but customers of these banks cannot avail loans or credit cards and the deposit limit is Rs. 1 lacs only. Customers can get the facilities like online banking, ATMs, Debit cards, etc.
11. Explain the major reforms in the banking sector during the post 1991 period.
Ans: The major reforms in the banking sector during the post 1991 period:
(a) The RBI has been empowered to issue licenses to new private sector banks as part of the liberalisation process. The private sector has been allowed to set up banks since, 1993. For this purpose, the Reserve Bank came out with a new set of guidelines in 1994 for the establishment of the banks in the private sector.
(b) The Reserve Bank has introduced capital adequacy norms in order to strengthen the capital base of the banks. Further to combat the menace of Non Performing Assets (NPA), the RBI has prescribed prudential norms in regard to income recongnition, asset classification, provisioning.
(c) Efforts have been made to recover the huge volume of NPA of the commercial banks. Some important measures adopted in this direction are establishment of the Debt Recovery Tribunals, Lok Adalat, One time Settlement Scheme etc. Recently, a new piece of legislation viz. The Recovery of Debts due to Banks and the Financial Institutions Act, 1993 has been passed to facilitate quicker recovery of dead loans.
(d) In the case of new NBFCs seeking registration with the RBI, the requirement of minimum net owned funds, has been raised to Rs. 2 crores.
(e) Interest rates on deposits and advances commercial and co-operative banks including urban co-operative banks have been deregulated to a greater extent.
(f) The high SLR and CRR reduced the profits of the banks. The SLR has been reduced from 38.5% in 1991 to 25% in 1997 and 18% in August 2021. The lower limit of SLR was removed in 2006. This has left more funds with banks for allocation to agriculture, industry, trade etc.
(g) The Cash Reserve Ratio (CRR) is the cash ratio of a bank’s total deposits to be maintained with RBL. The CRR has been brought down from 15% in 1991 to 4.1% in June 2003. At present CRR is 4 percent. The purpose is to release the funds locked up with RBI.
(h) By passing the Banking Companies (Acquisition and Transfer of Undertakings) Amendment Act, 1994, the government’s share in the paid up capital of public sector banks had been reduced to 51 percent.
(i) Banks are given full freedom to open, shift, and swap branches and also to open extension counters.
(j) The State Bank of India and other nationalised banks enabled to access the capital market for debt and equity. This is however, subject to the condition that the government share at time will not be below 51 percent of the paid capital.
12. Distinguish between private sector bank and public sector bank.
Ans: Following are the difference between public sector and private sector banks are as follows:
(a) Public Sector Banks are the banks, whose maximum shareholding is with the government. On the other hand, Private Sector Banks are the one whose maximum shareholding is with individuals and institutions.
(b) At present, there are 27 public sector banks in India, whereas there are 22 private sector banks and four local area private banks.
(c) Public Sector banks dominate the Indian banking system, by the total market share of 72.9%, which is followed by private sector banks by 19.7%.
(d) Public sector banks are established since long, while private sector banks emerged a few decades ago, and so the customer base of public sector banks is greater than the private ones.
(e) Transparency in term of interest rate policies can be seen in the public sector. The interest rate on deposits offered by the public sector banks to its customers is slightly higher than the private sector banks.
(f) When it comes to promotion of employees, public sector banks consider seniority as a base. Conversely, merit is the basis of private sector banks, to promote employees.
(g) Job security is always present in a public sector bank, but private sector bank job is secure only when the performance is good because performance is everything in a private sector.
(h) Along with job security, one more pros, of a public sector bank is the after retirement benefit, i.e. pension. On the contrary, pension scheme is not provided by private sector banks to its employees. However, other retirement benefits like gratuity, etc. are offered by the bank.
13. Difference between scheduled bank and non-scheduled bank.
Ans: The difference between scheduled bank and non scheduled bank are as follows:
(a) Scheduled banks follow the rules made by the RBI while Non-scheduled banks do not follow the rules made by the RBI.
(b) Scheduled banks are eligible for inclusion in the second schedule to the Reserve Bank of India Act, 1934 while Non-scheduled banks are not included in the second schedule.
(c) Scheduled banks are allowed to borrow money from RBI for regular banking purposes while Non-scheduled banks are not allowed.
(d) Scheduled banks can become a member of clearing house while Non-scheduled banks can’t.
(e) Scheduled banks and Non-scheduled banks both need to maintain the Cash Reserve Ratio but Scheduled banks have to deposit this amount in the RBI while Non-scheduled banks can deposit this amount with themselves.
14. What are the features of the Indian banking system?
Ans: The features of the Indian banking system:
(i) Deals with Money: A bank’s main characteristic is that it handles all financial transactions. You can put your money in a bank account, for example, to store it safely, and you will be interested in the money you save in the account.
(ii) Provides Loans: Banking gain additional money by providing loans for a variety of products. The bank earns the additional funds by lending money to the qualifying person at predetermined rates. Banks now provide loans for a variety of purposes, including study loans, vehicle loans, housing loans, personal loans, and so on.
(iii) Withdrawal and payment facilities: Customers can use a bank’s numerous payment and withdrawal services to receive their money quickly and easily. Customers can use cheques and draughts to withdraw money, as well as ATMs established by banks at various sites throughout the city.
(iv) Internet services: Modern banks now provide internet services, which is another element of a bank. The growth of the internet and its integration into the banking industry has made it even easier for customers to do numerous transactions. Through their apps, banks are providing online services. You can pay your bills, buy groceries, and shop without having cash on you.
(v) Business: Banking’s sole purpose is not to supply consumers with banking services. To make additional money, all banks are involved in subsidiary enterprises. Their only responsibility is to deliver optimum customer satisfaction and maximum interest rates in order to attract more clients to bank with them. To make a profit, money is moved from one hand to the next.
15. What are the importance of banking system in India?
Ans: The importance of banking system in India:
(i) Insufficient capital formation makes economic development difficult in a country. Commercial banks are encouraging individuals to save their money and mobilize it for beneficial uses at this time.
(ii) Credit creation boosts output, boosting economic growth and in turn creating a large number of job prospects.
(iii) Commercial banks promote balanced regional development in India by providing the required financial infrastructure and money to backward areas.
(iv) By providing timely loans to agricultural farmers, commercial banks aid in the promotion of the primary sector.
(v) They offer advanced loans to consumers for the purchase of assets such as residences, consumer goods, and furniture, among other things, and they encourage individuals to pursue a higher level of living.
(vi) The banking sector plays a significant part in the Indian economy, as commercial banks support the Indian government in achieving each aim of the country’s planned economic development.
(vii) For both internal and external trade, commercial banks offer the necessary financial backing and infrastructure.
16. What are the challenges faced by the Indian Banking System?
Ans: Some of the most recent challenges that continue to have a heavy influence on India’s financial system include the following:
(i) The rise of Non-Performing Assets (NPAs), including bad loans or problems in the agricultural and corporate sectors. Currently, the country’s NPAs have crossed 10 lakh crores, with more than 70% being from the corporate sector.
(ii) The increasing number of frauds, including accounting fraud, demand draft fraud, uninsured deposits, fraudulent loans, and others. The RBI in 2022 reported total fraud cases of around 9103, the biggest being the PNB scam of 11,000 crores, Vijay Mallya defaulting lenders for Rs.9000 crores, and several others that we have witnessed recently.
(iii) Lack of banking for the underserved and rural population, which is approximately 69% of India’s total population. Around 1.4 billion Indians do not have access to formal banking, as per the World Bank report.
(iv) Lack of reach in rural areas, where technical enablement and use of financial services remain a big challenge.
17. Write short note on the impact of pandemic covid-19 on the Indian banking system.
Ans: The COVID-19 pandemic could be one of the most serious challenges faced by the financial services industry in nearly a century. The COVID-19 impact on banking will be severe fall in demand, lower incomes, and production shutdowns and will adversely affect the business of banks. The situation is exacerbated by staff shortages, inadequate digital maturity, and pressure on the existing infrastructure as firms scramble to deal with the impact of COVID-19 on financial services. Banks certainly have their hands full in light of the novel coronavirus outbreak COVID-19. Borrowers and businesses face job losses, slowed sales, and declining profits as the virus continues to spread around the world. Banking customers are likely to start seeking financial relief. An obvious way that pandemics can impact financial systems is through their enormous economic costs. To managing the direct economic impact of the coronavirus, banks need to have a plan in place to protect employees and customers from its spread. Many banks are already starting to encourage remote working of some employees. In this paper, we are aimed to demonstrate an impact of pandemic covid-19 on the banking and financial sector. India’s coronavirus outbreak threatens a years-long clean up of its financial system, according to the Indian bank. Banks sit at the heart of the economy and provide funding to corporate and individuals. Their stability is crucial to keep the system up and running.
18. How does COVID-19 pandemic affects banking sector?
Ans: Banking sector was affecting in the following way:
(i) Fund recovery from defaulters: The banks are a safest source for raising credit and many of the customers raised fund from banks but the repayment does not take place on time during COVID-19 period previously. The collection ratio was around 90% but during this pandemic period declined upto is about 60%. There is a pressure on the banks but customers are not able to repay the debt on time due to lack of money flow in the economy.
(ii) Decrement in the value of bonds and others securities: In the pandemic period banks are negatively affected as the general public are not investing in the bonds and other financial instrument because all of them lost their value in this period and investing in these instruments may result into heavy losses for investors. Due to this whatever banks were earning previously are not able to earn and this result in further losses for banking sector. Derivatives positions are also affected due to this crisis and they also moved in some unexpected direction and trading becomes difficult.
(iii) Branch closure: Due to rapid spread of corona virus branches of almost banks are running with very less number of employees. So that the revenue of banks is affected and this is the reason for many banks to close their some of the branches. Also the activities like deposit, withdrawal, loans document collections and other banking operations are affected by this pandemic.
(iv) Increase in credit demand: During COVID period banks are facing the problem of fund which they used to provide to public and earn money in the form of interest. In this crucial period the demand for credit/ personal loan increased. The firms/ individuals require additional fund to meet their requirement as no other option left for them. So the banking sectors are unable to fulfil the credit demand for public.
(v) Disruption of workforce: Banking sector experiencing shortage of workforce due to lockdowns. Banking staffs already perform many duties for their customers. As they cannot deny performing their duties but it is a considerable risk to the health if they come to the office due to pandemic. This leads a disruption of workforce in the banking sector.
(vi) Increased cyber-crime: In order to retain the customers banking sector has no other option left except digital way to communicate various services they are offering or to continue their engagement with the customer through mobile or internet. By using this digital solution for banking services, there are many hackers who can send fake SMS and emails to mislead innocent customers by collecting their personal details and use it in their favour.
(vii) Problem of documentation: Documents are needed for opening bank account, card issue, loan sanctioning and other financial services. All these services been critical to process. There are digital services take place in the country to safeguard the economy but the mentioned services cannot be fulfilled through digital services, so there is a need for physical verification and document collection this become a problem for banking sector.
19. Discuss in details the Structure of Indian Banking System.
The Indian Banking System includes commercial banks, regional rural banks, urban cooperative banks, and primary agricultural credit societies. India’s modern banking began in the 18th century. The State Bank of India is the biggest and oldest surviving bank. It began as the Bank of Calcutta in mid-June 1806. Today it is one of the largest lenders in the country. The Indian subcontinent reaped the benefits of a favourable trade balance with exports outnumbering imports by wide percentages.
In India, three kinds of banks form the structure of the Indian banking system:
(A) Scheduled Banks: These are the banks included in the second schedule of the Reserve Bank of India Act of 1934. These banks are eligible for debts or loans at the RBI’s bank rate. Commercial and cooperative banks are subdivisions of scheduled banks.
(B) Non-scheduled Banks: Those banks which are not covered by the second section of the Reserve Bank of India Act, 1934. Except in times of crisis, they cannot borrow from the RBI for traditional banking purposes.
(i) Commercial Banks: The institutions that accept deposits from the general public and advance loans with the purpose of earning profits are known as Commercial Banks. Commercial banks can be broadly divided into public sector, private sector, foreign banks and RRBs.
In Public Sector Banks the majority stake is held by the government. After the recent amalgamation of smaller banks with larger banks, there are 12 public sector banks in India as of now. An example of public Sector Bank is State Bank of India.
Private Sector Banks are banks where the major stakes in the equity are owned by private stakeholders or business houses. A few major private sector banks in India are HDFC Bank, Kotak Mahindra Bank, ICICI Bank etc.
A Foreign Bank is a bank that has its headquarters outside the country but runs its offices as a private entity at any other location outside the country. Such banks are under an obligation to operate under the regulations provided by the central bank of the country as well as the rule prescribed of Foreign Bank in India is Citi Bank.
Regional Rural Banks were established under the Regional Rural Banks Ordinance, 1975 with the aim of ensuring sufficient institutional credit for agriculture and other rural sectors. The area of operation of RRBs are owned jointly by the Government of India, the State Government and Sponsor Banks. An example of RRB in India is Arunachal Pradesh Rural Bank.
(ii) Cooperative Bank: A Cooperative Bank is a financial entity that belongs to its members, who are also the owners as well as the customers of their bank. They provide their members with numerous banking and financial services. Cooperative banks are the primary supporters of agricultural activities, some small-scale industries and self-employed workers. An example of a Cooperative Bank in India is Mehsana Urban Co-operative Bank.
At the ground level, individuals come together to form a Credit Co-operative Society. The individuals in the society include an association of borrowers and non-borrowers residing in a particular locality and taking interest in the business affairs of one another. As membership is practically open to all inhabitants of a locality, people of different status are brought together into the common organisation. All the societies in an area come together to form a Central Co-operative Banks. Cooperative banks are further divided into two categories- urban and rural.
(a) Rural cooperative Banks are either short-term or long-term. Short-term cooperative banks can be subdivided into State Co-operative Banks District Central Co-operative Banks, Primary Agriculture and Rural Development Banks (SCARDBs) or Primary Cooperative Agriculture and Rural Development Banks (PCARDBs).
(b) Urban cooperative bank: Primary cooperative banks in metropolitan and semi-urban areas are referred to as this. Previously, the reach of such banks was limited but it has recently been greatly expanded. They help small borrowers and businesses with loans and services.
(c) Development Financial Institutions or Development Banks: Financial institutions that provide long-term credit in order to support capital -intensive investments spread over a long period and yielding low rates of return with considerable social benefits are known as Development Banks. The major development banks in India are; Industrial Finance Corporation of India (IFCI Ltd), 1948, Industrial Development Bank of India’ (IDBI) 1964, Export-Import Banks of India (SIDBI) 1989, National Bank for Agriculture and Rural Development (NABARD) 1982. The banking system of a country has the capability to heavily influence the development of a country’s economy. It is also instrumental in the development of rural and suburban regions of a country as it provides capital for small businesses and helps them to grow their business. The organised financial system comprises Commercial Banks; Regional Rural Banks (RRBs), Urban Co-operative Banks (UCBs), Primary Agricultural Credit Societies (PACS) etc. caters to the financial service requirement of the people. The initiative taken by the Reserve Bank and the Government of India in order to promote financial inclusion have considerably improved the access to the formal financial institutions. Thus, the banking system of a country is very significant not only for economic growth but also for promoting economic equality.