Banking Law — Answers - Friday

. Discuss the management and function of Reserve Bank of

India.
. Discuss origin and evolution of Banking insititution in India.

. What are the activities permitted by the banking Regulation

Act to be taken by banker.
. Discuss the function of commercial banks in India.

Q — Origin and Evolution of Banking Institutions

in India
Introduction
Banking in India forms the base for the economic development of
the country, comprising more than 70% of funds flowing through
the financial sector. The banking system has undergone
significant changes with technological advancements, adapting to
evolving needs.
Primary Functions of Banking System
○ Operations of Payment System
○ Depositor and protector of people's savings
○ Issue loans to individuals and companies

Historical Development Phases

Phase I: Pre-Independence Period (1786-1947)
The origin of banking in India can be traced to the foundation of
Bank of Calcutta in 1786 and the establishment of English
Agency houses in Bombay and Calcutta in the late 18th century.
Early Banking Evolution
○ The first bank in India was the "Bank of Hindustan"
(1770-1832), located in Calcutta
○ Over 600 banks registered during this period, but few
survived
○ Other early banks included:
◆ The General Bank of India (1786-1791)
◆ Oudh Commercial Bank (1881-1958)
2
Presidency Banks
During British rule, the East India Company established three
1
presidency banks:
○ Bank of Bengal (1809)
2
○ Bank of Bombay (1840)
○ Bank of Madras (1843)
1
These three presidency banks merged in 1921 to form the
Imperial Bank of India, which later became the State Bank of
India.
Indian-Owned Banks
○ Allahabad Bank - First Indian-owned bank (1865)
○ Punjab National Bank (1895)
○ Bank of India (1906)
○ Other banks established between 1906-1913:
◆ Canara Bank
◆ Indian Bank
◆ Central Bank of India
◆ Bank of Baroda
◆ Bank of Mysore
Central Banking
○ Reserve Bank of India established in 1935 on the
recommendation of Hilton-Young Commission
Phase II: Post-Independence Period (1947-1991)
Pre-Nationalization (1947-1969)
○ At independence, the entire banking sector was under private
ownership
○ Rural population relied heavily on money lenders
○ RBI nationalized in 1949 under the Banking Regulation Act
○ Imperial Bank of India nationalized in 1955 and renamed as
State Bank of India
Nationalization Period (1969-1991)
The government nationalized banks to expand banking services to
rural areas and provide financial assistance to weaker sections of
society.
First Wave of Nationalization (1969)
14 major banks with national deposits exceeding 50 crores were
nationalized:
. Allahabad Bank
. Bank of India
. Bank of Baroda
. Bank of Maharashtra
. Central Bank of India
. Canara Bank
. Dena Bank
. Indian Overseas Bank
. Indian Bank
. Punjab National Bank
. Syndicate Bank
 . Union Bank of India
. United Bank
. UCO Bank
Regional Rural Banks (RRBs)
○ Established on October 2, 1975
○ Based on recommendations of the Narasimham Committee
(1974)
○ Objective: Extend credit to rural sectors of society
Second Wave of Nationalization (1980)
Six more banks were nationalized, raising the priority sector
lending target to 40%:
. Andhra Bank
. Corporation Bank
. New Bank of India
. Oriental Bank of Commerce
. Punjab & Sind Bank
. Vijaya Bank

SBI Subsidiaries (Nationalized in 1959)

. State Bank of Patiala
. State Bank of Hyderabad
. State Bank of Bikaner & Jaipur
. State Bank of Mysore
. State Bank of Travancore
. State Bank of Saurashtra
. State Bank of Indore

Phase III: Liberalization Period (1991-Present)

Narasimham Committee Reforms
To improve financial stability and profitability of Public Sector
Banks, the Government set up a committee under Shri M.
Narasimham, which recommended:
○ No more nationalization of banks
○ Equal treatment of public and private sector banks by RBI and
Government
○ Permission for foreign banks to open offices in India
○ Encouragement for banks to adopt progressive functions like
merchant banking, underwriting, retail banking
○ Joint ventures between foreign and Indian banks
Private Sector Banks
RBI granted licenses to 10 private sector banks:
. Global Trust Bank
 . ICICI Bank
. HDFC Bank
. Axis Bank
. Bank of Punjab
. IndusInd Bank
. Centurion Bank
. IDBI Bank
. Times Bank
. Development Credit Bank
Recent Developments
○ Kotak Mahindra Bank and Yes Bank received licenses in
2003 and 2004
○ In 2014, RBI granted in-principle approval to IDFC and
Bandhan Financial Services
○ Introduction of Payment Banks
○ Establishment of Small Finance Banks allowed across India
○ Major shift to online banking with internet banking and fund
transfer apps
Historical Perspective on Banking
Ancient Banking Practices
○ Banking practices can be traced back to 2000 BC in
Babylonian civilization
○ Greek temples served as depositories for surplus funds
○ Banking existed in India during Vedic times (2000-1400 BC)
○ During the Sutra period (7th-2nd century BC), money
lenders called "Seths" performed banking functions
○ Kautilya's Arthasastra (4th century BC) mentioned
maximum interest rates
○ During the Maurya period, bankers were known as
"Sahukars" and "Mahajans"
○ Banking declined during Mughal period as Muslims regarded
interest as sin
Current State
Today, the Indian Banking industry is one of the most rapidly
growing and flourishing industries, serving as a cornerstone of the
nation's economic development.

Q — FUNCTIONS OF COMMERCIAL BANKS IN

INDIA
INTRODUCTION
In modern economy, commercial banks play an important role
in the financial sector. A bank is an institution dealing in money
and credit.
Credit money is the major component of money supply in a
modern economy.
Commercial banks are the creators of credit. The strength of
economy of any country basically depends on a sound and solvent
banking system.
A Commercial bank is a profit-seeking business firm dealing in
money or rather claims to money.
It safeguards the savings of the public and gives loans and
advances.
The Banking Companies Act of 1949 defines banking company
as:
"Accepting for the purpose of lending or investment of deposit
money from the public, repayable on demand or otherwise and
withdrawable by cheque, drafts, order or otherwise."

FUNCTIONS OF COMMERCIAL BANKS

Modern commercial banks perform a variety of functions. They
keep the wheels of commerce, trade and industry always
revolving. Major functions can be classified as:
. Primary or Banking Functions
. Secondary or Non-Banking Functions
. Subsidiary Activities
I. PRIMARY FUNCTIONS
Commercial banks have two important primary banking functions:
. Accepting Deposits
. Advancing Loans
1) DEPOSITS
One of the main functions of a bank is to accept deposits from
the public. Deposits are accepted in various forms:
a) Current Account Deposits
○ Usually opened by businessmen who have regular
transactions
○ No restriction on number and amount of deposits
○ No restriction on withdrawals
○ No interest paid (banks may even charge for this service)
○ Also known as demand deposits as amount can be
withdrawn on demand
b) Saving Account Deposits
 ○ Opened by salaried and other less income people
○ No restriction on number and amount of deposits
○ Withdrawals are subject to certain restrictions
○ Earns interest but less than fixed deposits
○ Encourages saving habit among salary earners
○ Important source of funds for banks
c) Fixed Account Deposits
○ These are time deposits
○ Money deposited for a certain fixed period (15 days to
several years)
○ High rate of interest is paid
○ Early withdrawal results in lower interest rate
○ Deposits can be renewed for further periods
○ Banks may sanction loans against security of fixed deposits
d) Recurring Account Deposits
○ Specified amount regularly deposited (usually monthly)
○ Forms the habit of small savings among people
○ At maturity, account holder gets a substantial amount
○ Interest rate almost equal to fixed deposits

2) LOANS AND ADVANCES

Banks lend to credit-worthy customers to maximize profits. Loans
and advances are granted to various sectors:
a) Business and Trade
Commercial banks grant short-term loans to business and trade in
the following forms:
i) Overdraft
○ Granted to current account holders
○ Borrower allowed to draw more than deposited amount
○ Fixed additional amount provided against collateral security
○ Interest charged on actual amount drawn
ii) Cash Credit
○ Given to meet regular working capital needs
○ Against security of goods or personal security
○ Interest charged on actual amount drawn
iii) Discounting of Bills
○ When bill holder needs urgent cash
○ Bank purchases instruments at a discount
○ Advance credit by discounting bills of exchange, government
securities, etc.
iv) Money at Call
○ Loans for a very short period (generally ≤7 days)
 ○ Repayable immediately at short notice
○ Given to dealers or brokers in stock market against collateral
securities
v) Direct Loans
○ Given against security of moveable properties
○ Maturity varies from 1 to 10 years
○ Interest paid on entire loan amount sanctioned
○ Types: personal loans, term loans, call loans, participative
loans, collateral loans, etc.
b) Loans to Agriculture
○ Short-term credit at lower interest rates
○ For irrigation, purchase of equipment, inputs, cattle, etc.
c) Loans to Industries
○ Secured loans to small and medium scale industries
○ For meeting working capital needs
○ Time period: one to five years
○ Forms: overdraft, cash credit, direct loan
d) Loans to Foreign Trade
○ Granted to exporters and importers
○ Forms: direct loans, discounting of bills, guarantee for
deferred payments
○ Lower interest rate
e) Consumer Credit/Personal Loans
○ Limited amount for buying durable consumer goods
○ Examples: television sets, refrigerators, washing machines
○ Repayable in installments
○ Under 20-point program, extended to cover expenses on
marriage, funeral, etc.
f) Miscellaneous Advances
○ Packing credits to exporters
○ Export bill purchase/discount
○ Import finance
○ Finance to self-employed
○ Credit to weaker sections at concessional rates

II. SECONDARY FUNCTIONS

Banks provide various services beyond their primary banking
functions:
1) AGENCY SERVICES
Banks act as agents to their customers, performing:
a) Collection
○ Collection of cheques, drafts, bills, promissory notes
 ○ Collection of dividends, subscriptions, rents
○ Nominal charges applied
b) Payment
○ Paying insurance premium, rent, taxes
○ Electricity and telephone bills payment
○ Commission charged for services
c) Income-Tax Consultant
○ Acting as income-tax consultants
○ Preparation and finalization of income tax returns
d) Sale and Purchase of Financial Assets
○ Undertaking sale/purchase of securities and shares
○ Based on customer instructions
○ Nominal charges applied
e) Trustee, Executor and Attorney
○ Custodian and manager of customer funds
○ Executor of deceased customer's will
○ Signing documents on behalf of customer as Attorney
f) E-Banking
○ Operation of account through internet
○ Payment of various bills
○ Money transfer from one place to another

2) UTILITY SERVICES
General utility services offered by modern commercial banks:
a) Letter of Credit
○ For foreign trade facilitation
○ Guarantee to foreign traders of customer soundness
b) Transfer of Funds
○ Cheap and safe transfer between locations
○ Forms: demand draft, mail transfer, travellers cheques
c) Guarantor
○ Guarantee of payment on behalf of importers
○ Facilitating imports with deferred payments
d) Underwriting
○ For Joint Stock Companies and government fundraising
○ Guarantee to purchase certain proportion of unsold shares
e) Locker Facility
○ Safe storage of valuables
○ For jewelry, securities, shares, documents
f) Referee
○ Reference regarding financial standing
○ Information on business reputation and customer
 ○
respectability
g) Credit Cards
○ Minimizing use of hard cash
○ Convenient medium of exchange
○ Enables purchase without using money

III. SUBSIDIARY ACTIVITIES

Many commercial banks undertake additional subsidiary activities:
1) Housing Finance
○ Provided against security of immovable property
○ Banks like SBI, Bank of India have housing finance subsidiaries
2) Mutual Funds
○ Pooling savings for collective investment
○ Diversified portfolio securities
○ Banks like SBI, Indian Bank have mutual fund subsidiaries
3) Merchant Banking
○ Management, marketing and underwriting of new issues
○ Project promotion
○ Corporate advisory services
○ Investment advisory services
4) Venture Capital Fund
○ Start-up capital for new ventures
○ Focus on risky, young, small private businesses
○ Technology-oriented and knowledge-intensive businesses
○ SBI, Canara Bank have venture capital fund subsidiaries
5) Factoring
○ Continuing arrangement between financial intermediary and
business
○ Purchase of client's accounts receivable
○ SBI and Canara Bank have established factoring subsidiaries
This structured format should help you remember the key points
about commercial banks and their functions for your exam. The
hierarchical organization with highlighting of important terms
should make it easier to grasp and recall the information.