MODERN BANKING PRACTICES

• INTRODUCTION
• Bank is the main confluence that maintains and controls the “flow of
money” to make the commerce of the land possible. Government
uses it to control the flow of money by managing Cash Reserve Ratio
(CRR) and thereby influencing the inflation level.
• Banking regulation act came in existence in 1949 with numerous
provisions which may be classified into two categories: (i) built in
safeguards and (ii) power and consequential functions and
responsibilities of the Reserve Bank of India. The other important
set of provisions pertains to the suspension of business by and
winding up of banking companies.
ORGIN OF BANKS
• The word Bank comes from the Italian word ‘Banco” which means
bench.
• In the mid ages , the money changers of Italy did their business in
the street on a bench. In fact, earlier the temples usually served as
the place to deposit money. In Rome in the 210 B.C., an ordinance
was issued that set aside a place for money changers.
Banking in India
• Banking in India, in the modern sense, originated in the last decade
of the 18th century. Among the first banks were the Bank of
Hindustan, which was established in 1770 and liquidated in 1829–32;
and the General Bank of India, established in 1786 but failed in 1791.
• The largest bank, and the oldest still in existence, is the
State Bank of India (S.B.I). It originated and started working as the
Bank of Calcutta in mid-June 1806. In 1809, it was renamed as the
Bank of Bengal. This was one of the three banks founded by a
presidency government, the other two were the Bank of Bombay
in 1840 and the Bank of Madras in 1843.
• The three banks were merged in 1921 to form the
Imperial Bank of India, which upon India's independence, became
the State Bank of India in 1955.
• For many years the presidency banks had acted as quasi-central
banks, as did their successors, until the Reserve Bank of India[5]
was established in 1935, under the
Reserve Bank of India Act, 1934
• Reserve Bank of India Act, 1934 is the legislative act under which
the Reserve Bank of India was formed. This act along with the
Companies Act, which was amended in 1936, were meant to provide
a framework for the supervision of banking firms in India
• In 1960, the State Banks of India was given control of eight state-
associated banks under the State Bank of India (Subsidiary Banks)
Act, 1959. These are now called its associate banks.
• In 1969 the Indian government nationalised 14 major private
banks, one of the big bank 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.
• The Indian banking sector is broadly classified into scheduled and
non-scheduled banks. The scheduled banks are those included
under the 2nd Schedule of the Reserve Bank of India Act, 1934
• The scheduled banks are further classified into: nationalised
banks; State Bank of India and its associates; Regional Rural Banks
(RRBs); foreign banks; and other Indian private sector banks.[7] The
term commercial banks refers to both scheduled and non-
scheduled commercial banks regulated under the
Banking Regulation Act, 1949
• The Banking Regulation Act, 1949 is a legislation in India that
regulates all banking firms in India.[1] Passed as the Banking
Companies Act 1949, it came into force from 16 March 1949 and
changed to Banking Regulation Act 1949 from 1 March 1966. It is
applicable in jammu and kashmir from 1956. Initially, the law was
applicable only to banking companies. But, 1965 it was amended
to make it applicable to cooperative banks and to introduce other
changes
• Banking Company means any company which transacts the
business of banking in India. Explanation: Any company which is
engaged in the manufacture of goods, or which carries on any
trade, and accepts deposits of money from the public merely for
the purpose of financing its business , shall not be deemed to
transact the business of banking within the meaning of this clause.
• Any resolution passed by the Banking Company in General
Meeting or by its Board of Directors, whether the same be
registered, executed or passed, as the case may be. It is further
provided that any provision contained in the memorandum,
articles, agreement or resolution aforesaid shall, to the extent to
which it is repugnant to the provisions of the Act, become or be
void.
• Any agreement executed by it Memorandum or Articles of a
Banking Company ACT TO HAVE OVERRIDING EFFECT Section 5A of
the Banking Regulation Act, 1949 provides that the provisions of
this Act shall have effect notwithstanding anything to the contrary
contained in:
• Any association of banks formed for the protection of their mutual
interests and registered under Section 8 of the Companies Act,
2013. A Subsidiary of a Banking Company formed for one or
more of the purposes mentioned in Section 19(1), whose name
indicates that it is a subsidiary of that banking company.
RESTRICTION ON USE OF WORD ‘BANK’, ETC.
• Section 7 of the Act provides that Individual, Firm or Group of
Individuals and any Company other than a Banking Company shall
not use as part of its name or, in connection with its business, any
of the words ‘bank’, ‘banker’ or ‘banking’ and No company shall
carry on the business of banking in India unless it uses as part of its
name at least one of such words. Exceptions:-
• NOT TO ENGAGE IN TRADING ACTIVITIES Section 8 provides that
any banking company shall not directly or indirectly deal in the
buying or selling or bartering of goods, except in connection with
the realization of security given to or held by it, or engage in any
trade, or buy, sell or barter goods for others otherwise than: •
DEFINITION OF BANK

• Section 5(b) of the BRA 1949, defines Banking as “accepting, for the
purpose of lending or investment of deposits of money received from
the public, repayable on demand or otherwise, and withdrawable by
cheque, draft, order or otherwise” •
Objectives of Banking Regulation Act 1949

• The Banking Act was enacted in February1949 with the following

objectives:
• (i) The provision of the Indian Companies Act 1913 was found
inadequate and unsatisfactory to regulate banking companies in
India. Therefore a need was felt to have a specific legislation
having comprehensive coverage on banking business in India.
• (ii) Due to inadequacy of capital many banks failed and hence
prescribing a minimum capital requirement was felt necessary.
The banking regulation act brought in certain minimum capital
requirements for banks.
• (iii) One of the key objectives of this act was to avoid cut throat
competition among banking companies. The act was regulated the
opening of branches and changing location of existing branches.
• iv. To prevent indiscriminate opening of new branches and
ensure balanced development of banking companies by system of
licensing.
• v) Assign power to RBI to appoint, reappoint and removal of
chairman, director and officers of the banks. This could ensure the
smooth and efficient functioning of banks in India.
• (vi) To protect the interest of depositors and public at large by
incorporating certain provisions, viz. prescribing cash reserve and
liquidity reserve ratios. This enable bank to meet demand
depositors.
• (vii) Provider compulsory amalgamation of weaker banks with
senior banks, and thereby strengthens the banking system in India.
• (viii) Introduce few provisions to restrict foreign banks in
investing funds of Indian depositors outside India.
• (ix) Provide quick and easy liquidation of banks when they are
unable to continue further or amalgamate with other banks.
•
•
COMMERCIAL BANKS

• According to CULBERSTON “Commercial banks are the institutions

that make short term loans to business and in the process create
money”.
• FUNCTIONS OF CB:
• Primary Functions-Banking Activities
• Secondary Functions- Non-Banking Activities
A. PRIMARY FUNCTIONS

• ACCEPTING DEPOSITS
• Acceptance of deposits is the most important function of commercial
banks. They accept deposits in several forms according to
requirements of different sections of the society. The main kinds of
deposits are:
i.Current Account Deposits or Demand
Deposits:
• These deposits refer to those deposits which are
repayable by the banks on demand:
• 1. Such deposits are generally maintained by
businessmen with the intention of making
transactions with such deposits.
• 2.They can be drawn upon by a cheque without
any restriction.
• 3. Banks do not pay any interest on these
accounts. Rather, banks impose service charges
for running these accounts.
(ii) Fixed Deposits or Time
Deposits
• Fixed deposits refer to those deposits, in which the amount is
deposited with the bank for a fixed period of time.
• 1. Such deposits do not enjoy cheque-able facility.
• 2.These deposits carry a high rate of interest.
(iii) Saving Deposits:
• These deposits combine features of both current account deposits
and fixed deposits:
• 1.The depositors are given cheque facility to withdraw money
from their account. But, some restrictions are imposed on number
and amount of withdrawals, in order to discourage frequent use of
saving deposits.
• They carry a rate of interest which is less than interest rate on
fixed deposits. It must be noted that Current Account deposits and
saving deposits are chequable deposits, whereas, fixed deposit is a
non-chequable deposit.
2. Advancing of Loans
• The deposits received by banks are not allowed to remain idle. So,
after keeping certain cash reserves, the balance is given to needy
borrowers and interest is charged from them, which is the main
source of income for these banks.
(i) Cash Credit
• 1.Cash credit refers to a loan given to the borrower against his
current assets like shares, stocks, bonds, etc. A credit limit is
sanctioned and the amount is credited in his account.The borrower
may withdraw any amount within his credit limit and interest is
charged on the amount actually withdrawn
(ii) Demand Loans:
• Demand loans refer to those loans which can be recalled on demand
by the bank at any time.The entire sum of demand loan is credited to
the account and interest is payable on the entire sum.
 (iii) Short-term Loans
• They are given as personal loans against some collateral security.The
money is credited to the account of borrower and the borrower can
withdraw money from his account and interest is payable on the
entire sum of loan granted.
3. Creation of credit
• Credit creation is most significant function of commercial banks.
While sanctioning a loan to a customer, they do not provide cash
to the borrower. Instead, they open a deposit account from which
the borrower can withdraw. In other words, while sanctioning a
loan, they automatically create deposits, known as a credit
creation from commercial banks.
4. Clearing of cheques.
It is the process of moving a cheque from the bank in which it was
deposited to the bank on which it was drawn, and the movement
of the money in the opposite direction. This process is called the
clearing cycle and normally results in a credit to the account at the
bank of deposit, and an equivalent debit to the account at the
bank on which it was drawn
SECONDARY FUNCTIONS

• 1. Agency Services.
• 2. General Utility Services.
1. Agency Services:
• Banks act as agents to their customers in different ways:
• (i)Collection and Payment ofVarious Items: Banks collect cheques,
rent, interest etc. on behalf of their customers and also make
payment of taxes, insurance premia etc. on their behalf.
• (ii) Purchase and Sale of Securities: Banks normally are more
knowledgeable with regard to stock and share business. As such
they buy, sell and keep in safe custody the securities on behalf of
their customers.
•
• (iii) Trustee and Executor: Banks also act as trustees and executors of
the property of their customers on their advice.
• (iv) Remitting of Money: Banks also remit money from one place to
the other through bank drafts.
• v) Purchase and Sale of Foreign Exchange:
• Banks buy and sell foreign exchange and thus promote
international trade. This function is mainly discharged by Foreign
Exchange Banks.
• Vi)Letter of References: Banks also give information about
economic position of their customers to domestic and foreign
traders and likewise provide information about economic position
of domestic and foreign traders to their customers. .
2. General Utility Services:
• Commercial banks also provide certain services of general utility to
the society: (i)Locker Facilities:
• Banks provide locker facilities to their customers. People can keep
their gold or silver jewellery or other important documents in these
lockers. Their annual rent is very nominal.
• (ii) Traveller’s Cheque and Letters of Credit:
• Banks issue traveller’s cheque and letters of credit to their
customers so that they may be spared from the risk of carrying
cash during their journey. (iii) Business Information and Statistics:
Being familiar with the economic situation of the country, the
banks give advice to their customers on financial matters on the
basis of business information and statistical data collected by
them.
CONCLUSION
• In the modern world, banks are to be considered not merely as
dealers in money but also the leaders in economic development.
• Used to sub-serve the national policy objectives of reducing
inequalities of income and wealth, removal of poverty and
elimination of unemployment in the country.
• Have been called upon to help achieve certain socio- economic
objectives laid down by the state.
Role of Commercial banks in economic developme
nt of a country

• 1. Capital Formation
• 2. Creation of Credit
• 3. Channelizing the Funds to Productive Investment
• 4. Fuller Utilization of Resources
• 5. Encouraging Right Type of Industries
• 6. Bank Rate Policy
• 7. Bank Monetize Debt
• 8. Finance to Government
• 9. Bankers as Employers
• 10. Banks are Entrepreneurs
REGIONAL RURAL BANKS

• The proposal for instituting a kind of ‘rural banks’ was first mooted
by the
• Banking Commission in its Report published in 1972.To strengthen
the field of co-operative banking in the rural sector, the
• commission in proposed the creation of a new category of ‘rural
banks’ in
• one of the three possible ways:
• Conversion of selected viable or potentially viable primary
agricultural
societies (PACS) into ‘rural cooperative banks’ which would
provide a full range of banking facilities, together with certain
closely allied non-banking services.
Restructuring a sound primary agricultural credit society as a
subsidiary of a commercial bank. It is to be called ‘rural subsidiary
bank’.
• Commercial banks may also set-up their own rural subsidiary banks
with local participation in capital and management, where suitable
primary societies are not available.
The scheme of Regional Rural Banks

• The Government thought of instituting rural banks as part of its

Twenty-Point Programme, also referred to as the New Economic
Programme, in1975, inspired by considerations of lowering the costs
of rural banking and operating such banks with local staff in a homely
atmosphere of the villages.
• The Government of India then appointed a Working Group on
Rural Banks headed by Shri M. Narasimah, to examine in detail the
issues involved in the establishment of new rural banks
as subsidiaries of the public sector banks to deal with the problem
of rural finance.
• The Working Group submitted its report on July30,1975.The
Working Group, how ever, conceieved a grossly different idea
from the concept of ‘rural banks’ advocated by the banking
Commission.
• The Group recommended the establishment of state-sponsored
regionally basedand rural oriented commercial banks called
Regional Rural banks.
,
• Based on the recommendation and after due consideration of the
scheme suggested by the Narasimah Committee’s Report, the
Government of India instituted Regional Rural
Banks Ordinance,1975, promulgated by the President of India
on September 26,1975.
Subsequently, on February 9, 1976, the Government of
Indiapassed the Regional Rural Banks Act, 1976, with clarification
on some issues.
•
Structure and Organisation of the
RRB
• The authorised capital of an RRB is fixed at Rs.1 crore and its
issued capitalat Rs. 2 lakhs. Of the issued capital, 50 percent is
to be subscribed by theCentral Government, 15 percent by
the concerned State Govrnment and therest 35 percent by the
sponsoring bank. The working and affairs of the RRB are directed
and managed by a Board of Directors consists of a Chairman,
• three directors to be nominated by thecentral Government
concerned, and not more than two directors to benominated by
the State Government concerned, and not more than 3directors to
be nominated by the sponsoring bank. The chairman isappointed
by the Central Government and his term of office does notexceed
five years.
•
OBJECTIVES OF RRB

• The Regional Rural Banks (RRB) aimed at providing credit and

otherfacilities to the small and marginal farmers, agricultural
labourers, artisansand small entrepreneurs in rural areas
Operations of RRBs
• In December 1989, 196 reporting RRBs have aggregate deposits of
Rs. 3,644 crores and advances of Rs. 3,155 crores. Over 92percent
of the total advances are made bythe RRBs to the weaker sections.
Theiradvances under IRDP during 1986amounted to Rs. 200 crores
relating to7,84,145 accounts.
Finance from NABARD
• In December 1986, the RRBs obtained
refinance amounting to Rs. 246.9 croresfrom the sponsor banks.
• They borrowed Rs. 226.9 crores of short-term loans and Rs. 80.3
crores of medium-term loans fromthe NABARD.
Working Group on RRBs

• The Reserve Bank of India had constituted a Working Group on RRBs,

under the chairmanship of Shri S. M. Kelkar, to review the various
aspects of the working of the RRBs. The Group submitted its Report
in June 1986.Following are the major recommendations of the Kelkar
Group:
• 1)The RRBs should be permitted to increase their authorisedshare
capital from Rs.1 crore to Rs.5 crores and issued capitalfrom Rs.25
lakhs to Rs.1 crore.
• 2)The sponsor banks should, on behalf of RRBs, invest thedeposits
kept by them in current account for SLR requirementin
government securities.
FUNCTIONS OF RRBS

• According to the Banking Commission, the rural banks should

render the following functions:
• To accept deposits
• To grant advancesTo provide ancillary banking services
• To supply inputs and equipments to farmers
•
• To provide asssistance in the marketing of their productsTo maintain
godowns
• To help in the overall development of villages in its areaTo extend
credit and all other banking services
Major Problems Faced By RRBs
• 1)Haste and lack of Co-ordination in Branch
Expansion:-
Haste in branch expansion programme in many
cases have resulted in lopsidedness due to lack of
co-ordination.
• 2)Difficulties in Deposit Mobilization:-On account
of their restrictive lending policy which excludes
richer sections of the village society, these
potential depositors show least interest in
depositing their money with these banks.
• 3)Constraints in Deposit Mobilisation:-
State and local Governmentsand their agencies
also have not co-operated much by maintaining
theirdeposits accounts with the RRBs
• 4) Slow Progress in Lending Activity:-
The RRBs pace of growth inloan business is slow.
• 5)Urban-Orientation of Staff:-
• There is no true local involvement of thebank staff
in the village where they serve.
• 6)Procedural Rigidities:-
The RRBs follow the procedures of thescheduled commercial banks
in the matter of deposits and advancing loanswhich are highly
complicated and time- consuming from the villagers’ point of view.