Organisation of Commerce and Management Chapter: 4 Business Service Class: 12th Commerce

 BANKING

 Q.1. What is meant by Bank?

Ans. The term Bank comes from the French word 'Banco' which means a 'bench’. A bank is a financial institution which deals with deposits and advances and other related services .Bank provides various services related to money or financial requirements of consumers.

 Q.2 What is meant by Banking Company?

As per The Indian Banking Regulation Act, 1949 banking company means "any company which transacts the business of banking in India" and the word banking has been defined as " accepting for the purpose of lending or investment of deposits of money from public, repayable on demand or otherwise, and withdrawable by cheque, draft and order or otherwise."

Q.3 Explain in detail about different types of Banks?

 Ans. 1) Central Bank: The central bank is the apex financial institution in banking industry in the country. Every country has their own central bank. In India, The Reserve Bank of India (RBI) is the central bank. The RBI was established in 1945 under the Reserve Bank of India Act, 1944.Some functions of RBI are as follows:

1. Frames monetary policy
2.  ii) Issues currency notes
3. iii) Acts as a banker to the Government
4. iv) Acts as a banker's bank to commercial and other banks in India.

2) Commercial Bank: The commercial banks play an important role in economic and social development of a country. Commercial banks perform important functions such as: Primary Functions i.e. accepting of deposits and lending of money and Secondary Functions i.e. agency functions and utility functions. In India, commercial banks are divided into three groups:

a) Public sector banks where majority of capital is held by government such as Bank of India, State Bank of India etc.

 b) Private sector banks are owned by group of individuals such as AXIS bank, HDFC bank etc.

c) Foreign banks are those banks which are established outside India but these banks have branches in India such as Citi bank, HSBC, and Standard Chartered etc.

 3) Co-operative Bank: In India, co-operative banks are registered under Indian Co-operatives Societies Act and regulated under Banking Regulation Act. Co-operative banks are popular in semi-urban and rural areas. The main aim of cooperative bank is to provide credit to economically backward people, farmers and small scale units. Generally, the co-operative bank works at three different levels:

a) Primary Credit Societies: Primary Credit Co-operative society's work at village level. They collect deposits from members and common public. They also get funds from the State Co-operative Bank and District Co-operative Banks for the purpose of lending.

 b) District Central Co-operative Bank: These banks operate at district level. They obtain deposits from the public at the district level and also get funds from the State Co-operative Bank for the purpose of lending.

c) State Co-operative Bank: This bank operates at state level. They provide funds to central cooperative bank and primary credit societies as required. State cooperative bank also performs function of monitoring over district bank and credit cooperative societies. List down primary credit societies, district banks and state co-operative bank in Maharashtra.

 4) Industrial Development Banks: These are financial institutions that provide medium and long term funds to the business firms Examples of development bank are Industrial Finance Corporation of India (IFCI), State Finance Corporation (SFC), Maharashtra State Finance Corporation (MSFC) etc. Some functions of development bank are as follows:

i) Provision of medium and long term funds to business units for the purpose of expansion and modernisation.

ii) Underwriting of shares issued by public limited companies.

iii) Purchase of debentures and bonds.

5) Exchange Banks: The exchange banks as well as large commercial banks facilitate foreign exchange transactions. Examples of exchange banks are Barclays Bank, Bank of Tokyo etc. Some functions of exchange bank are as follows:

i) Financing foreign trade transactions.

 ii) Issue of letter of credit (LC)

iii) Discounting of bills of exchange.

 iv) Remittances of dividend, interests and profits etc

6) Regional Rural Bank: Regional Rural Banks (RRBs) were established in 1975. These banks are sponsored by large public sector banks. The capital of RRB is contributed by Central Government 50%, State Government 15% and Sponsored Banks 35%. RRBs mobilise deposits primarily from rural and semi-urban areas and provide loans and advances mostly to small and marginal farmers, agricultural labourers and rural artisans.

7) Savings Bank: The main objective of savings bank is to encourage savings of the people, especially in rural areas. Examples of such banks include postal saving bank, commercial banks and cooperatives banks.

8) Investment Bank: These banks provide financial and advisory assistance to their customers. Their clients generally include business firms and government organisations. Investment banks facilitate mergers and acquisitions by undertaking research and providing advice on investment decisions. Generally, investment banks do not directly deal with general public.

 9) Specialised Banks: These banks cater to the requirements and provide overall support for setting up business in specific areas.

• Export and Import Bank (EXIM): This bank provides financial assistance to exporters and importers and functions as the principal financial institution for coordinating the working of institutions engaged in financing export and import of goods and services with a view to promoting the country's international trade.
• ii) Small Industries Development Bank of India (SIDBI): Small Industries Development Bank of India (SIDBI) set up on 2nd April 1990 under an Act of Indian Parliament, acts as the principal financial institution for promotion, Financing and development of the Micro, Small and Medium Enterprise (MSME) sector as well as for co-ordination of functions of institutions engaged in similar activities.
• iii) National Bank for Agriculture and Rural Development (NABARD): It is an apex institution for financing agricultural and rural sector. NABARD provides both short term and long term credit through regional rural banks. It is concerned with policy planning and operations relating to agricultural credit and credit for other activities in rural India. It provides finance to financial institutions and not to the individuals. Small Industries Development Bank of India (SIDBI) set up on 2nd April 1990 under an Act of Indian Parliament, acts as the principal financial institution for promotion, financing and development of the Micro, Small and Medium Enterprise (MSME) sector as well as for co-ordination of functions of institutions engaged in similar activities.
• iii) National Bank for Agriculture and Rural Development (NABARD): It is an apex institution for financing agricultural and rural sector. NABARD provides both short term and long term credit through regional rural banks. It is concerned with policy planning and operations relating to agricultural credit and credit for other activities in rural India. It provides finance to financial institutions and not to the individuals.

 Q.2 Write the note on new models of Banking.

 Ans. 1) Small Finance Banks - Small finance banks are a type of niche banks in India. These are banks with a small finance bank license and provide basic banking service of acceptance of deposits and lending. The aim behind these banks is to provide financial inclusion to sections of the economy not being served by other banks such as small business units, small and marginal farmers, micro and small industries and un-organised sector entities.

10 Existing non-banking financial companies (NBFC), microfinance institutions (MFI) and local area banks (LAB) can apply to become small finance banks. These banks can be promoted either by individuals, corporate, trusts or societies. They are established as public limited companies in the private sector under the Companies Act, 1956.They are governed by the provisions of Reserve Bank of lndia Act, 1934, Banking Regulation Act, 1949.There is no territorial restrictions for these bank. They were set up with the twin objectives of providing an institutional mechanism for promoting rural and semi urban savings and for providing credit for viable economic activities in the local areas.

Objectives of small finance banks:

1. provision of savings for unserved and underserved sections of the population, and
2.  (ii) supply of credit to small business units; small and marginal farmers; micro and small industries; and other unorganised sector. Examples are Jana Small Finance Bank, AU Small Finance Bank, Equitas Small Finance Bank etc.

2) Payment bank  It is a new model of banking. It is conceptualised by the Reserve Bank of lndia. The main aim is to offer financial services to small businesses and low income people. It is like any other bank as it can carry out most of the banking functions such as remittance services, mobile banking, ATM cards, net banking etc. But, it is not allowed to issue loans and credit cards. Similarly, it can accept the demand deposits only up to Rs. 1 lakh. Indian Post Payment Bank, Airtel Payment Bank, Paytm Payment Bank etc are some of the examples of active payment banks to the date.

**Q.1 What are the primary functions of Commercial Banks?

Ans. 1) Primary Functions: The primary functions of commercial banks are known as core banking functions. The primary functions are as follows:

 A) Accepting Deposits: Commercial banks collect deposits from individuals and organizations. The deposits can be classified into two types i.e. Time Deposits and Demand deposits.

 a) Time Deposits: Time deposits are called as time deposits because they are repaid to the customers after the expiry of decided time.

1) Fixed Deposit: Fixed deposit account is an account where fixed amount is kept for fixed period of time bearing fixed interest rate. Rate of interest is more as compared to saving bank account and varies with the deposit period.

2) Recurring Deposit: FUNCTIONS Secondary Functions (A) Agency Functions (B) Utility Functions Primary Functions

(A) Accepting Deposits

(B) Granting loans and advances

 It is operated by salaried persons and businessmen having regular income. A certain fixed sum of money is deposited into the account every month. Withdrawal of accumulated amount along with interest is paid after the maturity date. Rate of interest is higher which is similar to fixed deposit account. Separate passbook is provided to know the position of RD account.

 b) Demand Deposits: Demand deposits are those which are repaid to customers whenever they demand. That means, money can be withdrawn as per the wish of the customer through withdrawal slips, Cheques, ATM cards, online transfer etc.

 1) Saving Account: It is generally operated by those who earn regular or fixed income such as salary or wages. The main aim of this deposit account is to encourage habit of savings among people. These deposit accounts are meant for the purpose of maximum savings. There are restrictions on withdrawal limits from these accounts. These accounts carry low interest rates. Interest is credited monthly, quarterly, half-yearly and yearly basis on this account. Passbook facility, balance on SMS, account statement etc. facilities is provided to account holders to ascertain financial position.

2) Current Account: This account is operated by business firms and other commercial organizations such as hospitals, educational institutions etc. who have regular banking transactions. In this account there is no restriction on deposits and withdrawals of amounts. No interest is paid by the bank on this account. Overdraft facility is available for this account. For current account, banks provide statement of account every month

. B) Granting loans and advances: Banks grant loans and advances to business firms and others who are in need of bank funds. The loans are provided for longer period of time from 1 year and more. Advances are provided for shorter period from 4 months to 1 year. The advances are in the form of cash credit, overdraft and discounting of bills etc.

 1) Loans: Commercial banks provide loan to businessman and others. The borrowers can use entire amount sanctioned or can withdraw in installments. Interest is charged on the amount sanctioned. The loans are as follows:

a) Short Term Loans are for a period up to 1 year to meet working capital requirements of the borrower.

b) Medium Term Loans are for a period of 1 year to 5 years to meet working capital as well as fixed capital requirements of the borrower.

c) Long Term loans are for a period of 5 years or more to meet long term capital requirements of the borrower.

2) Advances: Advances are small term fund provided to businessman to satisfy different financial requirements of the business. Advances are as follows:

a) Cash Credit: The cash credit advances are provided to current account and savings account holders. It provides working capital for longer period of time. Interest rate is higher on CC. Separate CC account has to be maintained by the borrower.

 b) Overdraft: This facility is offered to current account holders to meet their working capital requirements. The period can vary from 15 to 60 days. Interest is charged on actual amount withdrawn. No separate account is maintained, and entries are shown in current account. It is a temporary arrangement for a short period.

 c) Discounting of bills of exchange: The drawer of bills of exchange or beneficiary can discount the bill with bank and obtain an advance. On the due date of the bill, the bank will recover the amount from the drawee.

**Q.2 What are the secondary functions of commercial banks?

Ans. Secondary functions of commercial banks are classified into two groups: (A) Agency Functions (B) Utility Functions

 A) Agency Functions: A commercial bank acts as an agent or representative of its client and performs certain functions as follows:

 1) Periodic Collections and Payments: Commercial bank collects salary, dividends, interests and any other income periodically as well as makes periodical payments such as taxes, bills, premiums, rent etc. on the standing instructions provided by customer. Commercial bank charges certain fixed amount quarterly or annually in the form of service charges from customer for providing such services.

 2) Portfolio Management: Large commercial banks undertake to purchase and to sell securities such as shares, bonds, debentures etc. on behalf of the clients. This handling of securities is known as portfolio management. Due to this facility more clients are opting for such services of commercial banks.

3) Fund Transfer: Commercial banks provide facility of fund transfer from one branch to another branch or branch of another bank. Commercial banks come with various initiatives to make these transfer hassle free.

 4) Dematerialisation: Banks provides dematerialisation facilities to their clients to hold their securities in an electronic format. On behalf of clients, it undertakes the electronic transfer of shares in case of purchase or sale.

5) Forex Transactions: Forex is an abbreviation for foreign exchange. A bank may purchase or sell foreign exchange on behalf of its clients. A bank purchases forex from its clients which the clients receive from foreign transactions and sell the forex when the clients need it for overseas transactions.

 B) Utility Functions: 15 A commercial bank performs utility functions for the benefits of its clients. It provides certain facilities or products to its clients as follow:

1) Issue of Drafts and Cheques: A draft /cheque are an order to pay money from one branch of bank to another branch of the same bank or other bank. A bank issues drafts to its account holders as well as non-account holders whereas cheques are issued only to the account holders. Bank charges commission for issuing a bank draft.

 2) Locker Facility: This is common utility function of any commercial bank. The bank provides locker facility for the safe custody of valuables, documents, gold ornaments etc.

 3) Project Reports: A bank may prepare project reports and feasibility studies on behalf of the clients. Project reports enable the business firm to obtain funds from the market and to obtain clearance from government authorities.

 4) Gift Cheques: Banks issue gift cheques and gold coins to account holders as well as to non-account holders. The gift cheques/ coins can be used by the clients for the purpose of gifting on occasions like weddings, birthdays etc.

 5) Underwriting Services: A commercial bank may underwrite the issue of securities issued by companies. If the shares are not fully subscribed, the underwriting bank agrees to take up the unsubscribed portion of the securities.

 6) Gold related Services: Now days many banks are providing gold services to its customers. Bank are commercially buying and selling gold or gold ornaments from customers on large scale basis. Some bank also provides advisory services to its customers in terms of gold funds, gold ETF etc 4.5.4. E-Banking

 Q.1 What is E-banking?

 Ans. E-banking stands for electronic banking it are also called 'Virtual Banking'. E-banking is the result of the development in the field of electronics and computers

. Q.2 What are the elements of E-Banking?

Ans. Under E-banking, the banking operations are computerised. Some of the elements of E-banking are as follows:

1) Automated Teller Machine: The ATMs are electronic machines which are operated by the customer on his own to with- draw or deposit money. It can be used for other banking transactions also such as balance enquiry, transferring money, request for cheque book or bank statements etc. Nowadays, ATM also provides facility of cash deposits through CDM (cash deposit machines.)

 2) Credit Cards: A credit card is a payment card. It allows the cardholder to pay for different transactions he performs. The issuing bank creates a revolving account and grants a line of credit to the customer or user. Credit card offers convenience to customers as customer need not carry cash.

(3) Debit Cards: 17 Most of the banks nowadays offer debit card as soon as account is opened by account holder. Through debit card payments, the amount gets deducted from account holder's account. Some banks offer personalised debit and credit cards as per the requirement of customer.

 4) RTGS: RTGS stands for Real Time Gross Settlement. RTGS is a fund transfer system where transfer of funds or money takes place from one bank to another bank on "real time" and on "gross basis". It is the fastest money transfer system through the banking channel.

 • Real Time Settlement means payment transaction is not subject to any waiting period. The transactions are settled as soon as they are processed. The receiving bank has to credit the account of the client within 2 hours of receiving the funds transfer message.

 • Gross Settlement means the transactions are settled on one to one basis without bunching with any other transactions. The minimum amount to be remitted through RTGS is Rs. Two lacs while there is no upper limit for transactions. However, amount changes from bank to bank

 5) NEFT: NEFT stands for National Electronic Fund Transfer. Under this system, funds are transferred electronically from one branch to another branch or 18 one bank to another bank in the country. The client has to give details of NEFT code of branch and account number of beneficiary to whom the money is to be transferred.

6) Net Banking and Mobile Banking: With the introduction of net banking, the client is able to transact banking operations with the help of computers, laptop and other gadgets. The internet banking services enable a client to check various transactions, facilitates payments of various things, transferring funds etc