INTRODUCTION TO BANKING

MODULE 1
 Origin of Banking Activities

• There is no unanimous opinion

among writers on banking
regarding the origin of the term
"bank".
• To some authors, the word bank
seems to have been derived from
the Italian word "banco", the Latin
word "bancus" and the French
word "banque", all of these means
a bench.
• But , the generally accepted view , the term
bank is derived from the German word
"bank", which means heap of money
(accumulation of money) collected from a
large number of members of the public.
• The early European bankers raised a common
fund from the public for the purpose of
lending the same to those who need it.
• Since the banks deal in common fund
collected from the public, the term bank
should be associated with the German word
"bank".
Ancestors of Modern Banks
• According to G. Crowther,
modern banks have three
ancestors. They are the
merchant, money lenders and
Gold-smiths.
The Merchant
• The merchant forms the earliest stage in the evolution
of banking.
• In olden days, the merchants collected deposits from
their customers for the purpose of financing their
trading business.
• As an acknowledgement for the receipt of money, they
began to issue documents which were accepted as title
to money.
• One of the important functions of modern banker is to
remit money from one place to another through
cheques, drafts or travelers cheques.
• It is believed that the practice of issuing documents by
the merchants gave rise to the system of remitting
money from one place to another by the modern
banker.
The Money Lender
• The second ancestor to the modern banker
is the money lender.
• The money lenders used to lend their
surplus funds to the needy at high rates of
interest.
• Also, they accept money for the purpose of
investment from those who had surplus
money to spare.
• The difference in rate of interest being the
profit of money lenders.
• In fact, the money lenders laid the
foundation of modern banking of accepting
deposits and lending money.
The Goldsmith
• At the time when Gold and silver were the
money, the Goldsmiths in England started
accepting precious stones and valuables for
safe keeping.
• For the money accepted for safe custody they
issued deposit receipts popularly known as
"Goldsmith's notes".
• These deposit receipts were honored by the
goldsmiths gave rise to the modern cheque.
• The deposit receipts issued by the gold-
smiths laid the real foundation of the bank
notes issued by the Central Bank of a country.
Origin of banking in India
• In india, in 1786, the General Bank of India was established as the
first joint stock bank.
• Later in June 1806, the Bank of Bengal was established in Kolkatta,
• Bank of Bombay in 1840 and
• Bank of Madras in 1843.
(The banking business in India was controlled and dominated by
these three presidency banks till they were merged to form the
Imperial Bank of India in 1921).
• Until the establishment of RBI in 1935, the Imperial Bank of India
was performing the entire banking transactions of the government.
• Later the Imperial Bank of India was renamed as State Bank of
India by passing the State Bank of India Act 1955.
• After independence, the government of India nationalized RBI in
1948 and it became an institution owned by the government of
India.
• Later in 1949, the Banking Regulation Act was enacted which
empowered the RBI to regulate, control and inspect the commercial
banks in India., became the Central Bank.
Meaning and Definition of Bank
• A bank is an institution which accepts
deposits from the public and makes it
available for those who need it.
• A bank helps in the remittance of
money from one place to another.
• According to Crowther, a bank
"collects money from those who have
it to spare or who are saving it out of
their incomes and it lends this money
to those who require it"
• According to John Paget "No
one can be banker who does
not (i) take deposit accounts
(ii) take current accounts (iii)
issue and pay cheques and
(iv) collects cheques-crossed
and uncrossed for its
customers".
• The Banking Regulation Act
1949 defines the term
banking as "accepting for the
purpose of lending or
investment, of deposits of
money from the public
repayable on demand or
otherwise, and withdraw able
by cheque, draft, and order
Short, a modern bank refers to
– an institution that accepts deposits
and lends money
– an institution that creates credit
– an institution that aims at making
profit
– an institution that performs a
number of agency and general
utility services to its customers.
 Classification of Banks
I.Classification on the basis of functions
1. Commercial Banks
2. Industrial Banks
3. Agricultural Banks
4. Exchange Banks
5. Saving Banks
6. Central Bank
7. World Bank
8. EXIM Bank
Classification on the basis of
Ownership
1. Public Sector Banks
2. Private Sector Banks
3. Co-operative Banks
Classification on the Basis of
Domicile
4. Domestic Banks
5. Foreign Banks
Classification on basis of
Registration
1. Scheduled Banks
2. Non Scheduled Banks
3. Licensed Banks
4. Non Licensed Banks
 Classification on the basis of functions

1. Commercial Banks
• Commercial banks are those banks which carry
on commercial banking operations such as
– acceptance of deposits from the public
– repayable on demand or after a short period,
– and grant short term credit mainly to trade,
commerce and industry,
– with a wide network of branches spread throughout
the country.
• Since the deposit of commercial banks are
repayable on demand or after a short period,
these banks are mainly concerned with the
supply of short term credit requirements of
trade and industry.
2. Industrial Banks
• Industrial bank are established to provide long-term financial
requirements of industries.
• Financial requirements of industries are two types Viz, long
term requirements or fixed capital requirement and short
term requirements or working capital requirements.
– Fixed capital is needed to acquire fixed assets like land, buildings,
plant and machinery, tools etc.
– Working capital is required for the purchase of raw-materials and to
meet the day-to-day expenses in connection with the conversion of
raw-materials into finished products.
• Since commercial banks satisfy only the short term
requirements of industries, there comes the need for
specialized institutions that satisfy the long term credit
requirements of industries.
• Such institutions are called Industrial Banks. Industrial
Development Bank of India, (IDBI), Industrial Credit and
Investment Co-operation of India, (ICICI), State Financial
Corporations (SFCs) are examples of industrial banks.
3. Agricultural Banks
• Agricultural banks are those banks which are
intended to provide agricultural credit.
• Agricultural farmers require both short term as well
as long term credit. Short term credit is needed to
buy seeds, fertilizers and other agricultural inputs.
• Long term credit is needed to make permanent
improvements on land, to purchase land, to
purchase agricultural implements like pump sets,
tractors etc.
• In India, agricultural credit is provided by co-
operative Institutions. The primary co-operative
banks are meant to provide short term credit and
land development banks are meant to provide long
term credit.
4. Exchange Banks
• Exchange banks are those banks that deal in
foreign exchange and specialize in financing
foreign trade.
• Trade between two countries is called
foreign trade.
• In the case of foreign trade, the settlement
requires conversion of one currency into
another.
• The main function of exchange banks is to
facilitate conversion of one currency into
another.
• In India, almost all commercial banks have
its own foreign exchange divisions.
5. Saving Banks
• Saving banks are those banks which
promote saving habits among the public
and mobilize the scattered savings of
the society into a common reservoir.
• These banks invest the savings so
mobilized for productive purposes.
• In India, Post office savings banks, Unit
trust of India (UTI), municipal saving
banks and the saving bank accounts
maintained by commercial banks are
examples of saving banks.
6. Central Banks
• Central bank is the top most banking institution
which controls, regulates and supervises the
monetary and credit system of a country.
• The Central Bank of a country has the power to
control all the banking institutions in the
country and is usually the basic source of the
nation's bank credit.
• It has the monopoly of issuing notes. Reserve
bank of India (RBI) is the Central bank of India.
• All currency notes, beyond the denomination of
rupee one is issued by the Reserve Bank of
India.
7. World Bank
• World Bank, also known as International Bank
for Reconstruction and Development (IBRD),
is a bank established for the purpose of
– (a) providing long term loans for restructuring the
economies damaged by second world war and
– (b) developing the under developed economies.
• Thus, the member countries of the World
Bank get financial assistance from the World
Bank.
• The World Bank was set up on the
recommendations of Bretton Woods
Conference held at Geneva.
8. EXIM Bank
• Export Import Bank (EXIM Bank) was set up on
Jan 1982 as the apex banking institution in the
field of financing foreign trade of India.
• The functions as the principal financing
institution for coordinating the working of
other institutions engaged in financing of
exports and imports of goods and services.
• The major function of EXIM bank is to provide
financial assistance to exporters and
importers.
• It also provides refinance facilities to
commercial institutions against their export-
import financing activities.
 II. Classification on the Basis of Ownership

1. Public Sector Banks

• Public sector banks are those banks
which are owned and controlled by the
government.
• All the nationalized banks in India and
Regional Rural Banks (RRBs) are
public sector banks.
• SBI, Union Bank, Bank of Baroda,
Indian Overseas Bank etc. are a few
examples of public sector bank.
2. Private Sector Banks
• Private Sector banks are those banks which are
owned and controlled by private individuals or
corporations and not by the government.
• South Indian Bank Limited, Federal Bank Limited,
Catholic Syrian Bank Limited, Dhanalakshmi Bank
Limited etc. are a few examples of private sector
banks in India.
• Liberalization of the Indian economy has led to the
formation of new private sector banks popularly
known as new generation banks or Hi-tech banks.
• Some of them are IDBI Bank, ICICI Bank, Axis Bank
(formerly known as UTI Bank), HDFC Bank,
Centurion Bank etc.
3. Co-operative Banks
• Co-operative banks are those
banks which are owned and
operated by co-operative
societies. In India, co-
operative banks are
established for meeting
financial needs in rural areas.
 III. Classification on the Basis of Domicile

1. Domestic Banks
• Domestic banks are those banks
that are registered within the
country.
• As far as India is concerned, any
bank registered in India as a
banking company is a domestic
bank.
2. Foreign Banks
• Foreign banks are those banks
that are registered in a foreign
country and have their head
office in foreign country.
• As far as India is concerned, any
banks registered outside India
and have a branch in India is a
foreign bank. Example, Citi bank.
 IV. Classification on the Basis of Registration

1. Scheduled and Non-Scheduled Banks

• Scheduled banks are those banks whose name
appears in the 2nd schedule to the Reserve bank of
India Act 1934.
• A bank must satisfy the following conditions to get
its name included in the schedule.
• It's paid up capital and reserves have an aggregate
value of not less than Rs. 5 lakhs.
• It must satisfy the RBI that its affairs are not being
conducted in a manner detrimental to the interest of
its depositors.
• It must be a corporation or a corporate body and not
a partnership or sole proprietorship concern.
• Non-Scheduled banks are those banks whose name is
not included in the 2nd schedule to the RBI Act 1934.
2. Licensed and Non-Licensed Banks
• Licensed banks are those banks which
have been given a license from the RBI
for carrying on banking business in India.
• Under the Banking Regulation Act 1949,
every banking company must obtain a
license from the RBI for doing banking
business in India.
• Non-licensed banks are those banks
which do not have a license from the RBI.
Commercial banks
• Commercial banks are those banks, which
accept deposits from the public and lend them
for short periods for trade and industry.
• The commercial banks are classified into (a)
Scheduled and (b) Non-Scheduled banks. Banks,
which are included in the second schedule of the
RBI Act are known as scheduled banks.
• Scheduled banks are entitled to get borrowing
facilities from the RBI and they are also covered
by the deposit insurance scheme and the credit
guarantee scheme.
• The banks, which are not included in the
second schedule of RBI Act, are called non-
scheduled banks.
• The classification of scheduled and non-
scheduled commercial banks lost significance
in the wake of nationalization of commercial
banks in 1969 and later in 1980.
• Now non-scheduled commercial banks are
disappearing from the banking scene.
• Scheduled commercial banks can be public
sector banks and private sector banks.
• Indian public sector banks consist of State
Bank group and other nationalized banks.
 Functions of Commercial Banks

Primary Functions
Accepting Deposits
• The most important function of a bank
is to accept deposits from the public.
• Through this function banks pool
together the scattered savings of the
society for being used for productive
purposes.
• The different types of deposits
accepted by a commercial bank are:
Fixed deposits or Time deposits
• Fixed deposits are those amounts deposited for a fixed
period of time and can be withdrawn only after the expiry of
fixed period
• The fixed period may be for a period of one year, two year or
five years. As money is deposited for a fixed period, the rate
of interest on this type of deposit is higher as compared to
other types of deposits. At the time of making fixed deposit,
the bank issues a receipt to the depositor known as Fixed
Deposit Receipt (FDR).
• It contains" the amount of deposit, name of depositor, rate
of interest on deposit and the maturity date of deposit.
• This receipt has to be surrendered to the bank on the due
date for getting the deposits back.
• Now a days, banks allow fixed deposit holders to close their
accounts prematurely and withdraw money before due date.
Current Deposits or Demand deposits
• Current deposits are those deposits into which money
can be deposited any number of times and from which
money can be withdrawn as many times as the
depositor wants.
• These accounts are generally maintained by traders
and businessmen who have to make a number of
payments on a single day.
• Current deposits are repayable on demand and hence it
is called demand deposits. Current account holders
have the facility of withdrawing money through the
issue of cheques.
• Since current deposits are repayable on demand, banks
are required to keep a major portion of their current
deposits in liquid form and as such practically no
interest is paid on these accounts.
Saving Deposits
• Saving deposits are those deposits which are
intended to encourage saving habit among the
general public.
• Such accounts are opened by middle and low
income groups who wish to save a part of their
current incomes for their future needs.
• In the case of saving deposits, customers can
deposit any amount of money at any number of
times.
• But certain restrictions are imposed on depositors
regarding the number of withdrawals and the
amount to be withdrawn in a given period.
• Cheque facility is provided to saving depositors as
well.
Recurring Deposits
• Recurring deposits are those deposits in
which the depositor deposits a fixed sum of
money every month for an agreed period.
• At the end of the specified period, the
depositor gets back the amount deposited
together with the interest accrued thereon.
• The rate of interest on these deposits is
almost the same as that of fixed deposit.
• The period for which a recurring deposit is
opened varies between one year to ten
years.
b) Lending Money
• The second important function of a bank is to
advance loans to the public. Banks lend
money in the following ways.
Overdraft
• An overdraft in a temporary financial
arrangement under which a current account
holder is permitted by the bank to draw
more than the amount standing to his credit.
• The current account holders can draw money
up to a limit as agreed between the banker
and account holder.
Cash Credit
• A cash credit is a financial arrangement
under which a borrower is allowed an
advance under a separate account called
cash credit account up to a specified limit
called cash credit limit.
• Such loans are usually given against the
hypothecation or pledge of agricultural or
industrial products.
• Depending up on the requirements of the
borrower he can withdraw money from the
cash credit account from time to time.
• Interest will be charged only on the amount
actually withdrawn from the account.
Discounting of Bills of Exchange
• A bill of exchange is an assurance given by
a debtor to his creditor to pay the amount
mentioned in the bill on the expiry of a
stated period.
• Discounting bill of exchange is a form of
lending by a banker under which the banker
pays the amount of the bill, after . deducting
a small amount as his commission, to its
holder before the due date.
• When the bill of exchange matures, the
bank gets its full amount from the person
who accepted the bill (debtor).
Money at Call and at Short notice
• This is a type of loan given by one bank to
another bank or a financial institution.
• Such loans are very short period loans and
can be called back by the bank at a very short
notice of one day to fourteen days.
Term loans
• Term loans are loans granted by a bank for a
period exceeding one year.
• The amount of such loans is either paid or
credited to the account of the borrower.
• Interest will be charged on the entire amount
of the loan and the loan is to be repaid either
on maturity or in installments.
Bridge loans
• A bridge loan is a form of short term temporary
financing for an individual or business firm until a
more comprehensive long term financing is arranged.
• As the term implies, a bridge loan bridges the gap
between more permanent methods of financing.
• A bridge loan is required whenever a company or an
individual runs out of funds for a short period.
• Bridge loans are useful for venture capitalist, real
estate industry and small investors.
• An individual involved in real estate business can
take a bridge loan to satisfy his temporary financial
needs because there is always a time lag between
the sale of one property and the purchase of another.
• Bridge loans are also called swing loans.
The following are the features of bridge
loans.
• (a) It is a type of short term loan normally
taken for a period of 2 weeks to 3 years
• The purpose of bridge loan is to provide
for an immediate flow of capital in times
of unexpected financial need.
• It is expected to be paid back quickly as it
is taken for very short periods.
• It is very expensive
2) Secondary functions
• The secondary functions of commercial banks include
agency services and general utility services.
AAgency services
• Sometime, commercial banks act as agents for their
customers. Following are the agency services given
by a banker on behalf of their customers.
a. Transfer of funds :-
• Banks help their customers in transferring funds
from one place to another through cheques, drafts
etc.
b. Collection of cheques, bills and promissory notes:-
• On behalf of the customers, banks accept cheques,
bills and promissory notes for collection.
Execution of standing orders:-
• A"standing order is an order given by
customer in writing to his bank for making
certain payments on behalf of -him. Thus
banks pay subscriptions, rents, insurance
premium etc.. on behalf of their customers.
Purchase and sale of securities:-
• Banks undertake purchase and sale of
various securities like shares, stocks, bonds,
debentures etc.. on behalf of their
customers.
Collection of dividend on shares:-
• Banks collect dividend shares and interest on
debenture for their customers.
 Income tax consultancy :-
• Banks help their customers in preparing
income tax return and give advice on
various issues on tax matters.
Acting as a trustee and executor:-
• Banks preserve the wills of their
customers and execute them after their
death.
B) General Utility Services
• A modern banker provides many other
services in addition to the agency
services. Some of them are detailed
below:
Providing locker facility:-
• Bank locker is a place where customers
can keep their valuables and important
documents for safe custody.
Issue of traveler's cheques:-
• Banks issue traveler's cheques to
facilitate their customers to travel
without the fear of theft or loss of money.
Issue of Letter of credit:-
• Letter of credit is an important document
in foreign trade. Through letter of credit,
a banker certifies the credit worthiness of
his customer.
Collection and dissemination of
information:-
• Banks collect important information
relating to trade, commerce, industry
money and banking and publish the same
in journals and bulletins.
Underwriting securities:-
• Banks underwrite the securities issued by
the government, public or private bodies.
Dealing in foreign exchange:-
• Banks deal in the business of foreign
currencies to enable foreign trade
Acting as a referee:-
• Sometimes customers quote their
bank's name for reference in cases
where any one wants to know about
the customers financial position and
business reputation.
Issue of ATM cards:-
• Now a days all banks started issuing
ATM cards to their customers to
enable them to withdraw money
during 24 hours a day.
Merchant banking:-
• Merchant baking divisions of
commercial banks offer a wide range
of services like financial, technical and
managerial services.
Lease Finance:-
• Modern commercial banks provide
lease finance to industries. Lease is a
mechanism by which a person acquires
the use of an asset by paying a pre
determined a mount called 'rental'
periodically over a period of time.
Housing finance:-
• Commercial banks provide housing
finance facilities to individuals and
institutions engaged in the construction
of residential houses at a concessional
rate of interest.
Factoring services :-
• Modem commercial banks provide
factoring services to business concern by
purchasing their book debts and
receivables for the purpose of collection,
management and for providing other
similar services.
Credit Creation by Commercial banks
• Creation of credit is an important function
of commercial banks.
• Credit creation refers to capacity of a bank
to create derivative deposits out of the
primary deposits.
• Primary deposit means a deposit arising
from the entrustment of currency by a
depositor.
• The primary deposits enable the banker to
create additional deposits which can be
called derivative deposits.
• They are called derivate deposits because
they are derived from the lending of the
primary deposits.
• The process of credit creation by
commercial banks can be better
explained with the help of an example.
• Let us make the following assumptions,
• The pubic are highly banking minded
settling all the transactions through
cheques.
• There is only one bank in existence.
• The total legal tender money in
circulation is Rs.10,000/-
• The banks keeps a cash reserve of 20%
to meet the requirements of depositors.
• Under the above assumptions, the balance
sheet of the bank will be as follows.
• The process of credit creation by commercial
banks can be better explained with the help
of an example. Let us make the following
assumptions,
• The pubic are highly banking minded settling
all the transactions through cheques.
• There is only one bank in existence.
• The total legal tender money in circulation is
Rs.10,000/-
• The banks keeps a cash reserve of 20% to
meet the requirements of depositors.
Liabiliti Rs. Assets Rs
es
Deposits: Cash in 10000
hand
Primary
10000
10000
Total 10000

Total
• The bank keeps a cash reserve of 20% of total
deposits. That is Rs.2000 and it advances
Rs.8,000 to borrowers.
• While granting loan bank does not give cash to
the borrower but simply credits customer's
account with the amount of the loan and
authorizes the borrower to withdraw money from
his account to the extent of the loan given. (Rs.
8,000 in the above case).
• The borrower may issue cheques in favor of his
creditors for making payments which in turn are
deposited by the creditors in the same bank
(since there is only bank).
• In this process the transaction between the
borrower and the creditors are settled without
affecting the cash balance of the bank.
Liabilities Rs Assets Rs

Deposits Cash in 10000

hand
Primary 10000 8000
Advances
Derivative
8000

Total
Total 18000 18000
• Now the total deposits with the
bank are Rs.18,000. It need to
keep a cash reserve of 20% on
Rs.18,000.
• That is Rs. 3,600. But the bank
has Rs.10,000 as cash in hand. It
can further lend Rs.6,400/-
(10,000 - 3,600).
• Now the balance sheet of the
bank will be as follows.
Liabilitie Rs Assets Rs
s
Deposits Cash in 10000
Primary hand
Derivative
10000 8000
(8000+64 Advances
00) 14400 14400
6400

Total 24000 24400

• In this manner, a bank can go on lending till
Rs. 10,000 becomes 20% of the total
deposits.
• Therefore the bank can have a total deposit
of Rs. 50,000 (10000 x 100) if it has a
primary deposit of Rs.10,000.
• The additional deposit of Rs. 40,000
credited by the bank is known as derivative
deposit.
• From the above discussion it is clear that
whenever a loan is granted to a customer a
new deposit arises.
• So it s said that "every loan creates a
deposit and every deposit creates a loan".
Credit creation when there is more than one
bank
• So 'as our discussion was based on an assumption that
there is only one bank.
• But in actual practice there are many banks. In such
case also the total credit/deposit creation of the entire
banking system will remain unaffected.
• There will be simply transfer of deposit from one bank
to another.
• For example there are two banks SBI and Canara bank.
Mr.Thomas is the customer of SBI and Mr. Jacob is the
customer of Canara Bank.
• Mr.Thomas draws a cheque in favour of Mr. Jacob
which Mr. Jacob deposits with Canara Bank.
• In such a case there will be a transfer of funds from
SBI to Canara Bank without in any way affecting the
total deposits of the banking system.
Limitations of Credit creation
• There are certain factors that restricts the
capacity of a banker to create derivate
deposits from primary deposits. They are :-
I.Availability of primary deposits
• Banks create credit from primary deposits.
Higher the amount of primary deposits, higher
will be its capacity to create credit and vice
versa.
II. Cash Reserve Requirement
• If the cash reserve requirement is very high
then the capacity to create credit will be very
low. On the contrary, if the cash reserve
requirement is very low then the capacity to
create credit will be very high.
III. Availability of Good securities
• A bank will lend money only if the borrowers are able
to provide good securities. Therefore, the availability
of good securities is a preventing factor for credit
creation.
IV. Banking habit of the general public
• If the public makes increasing use of cheque facility
for settling their transactions, then the banks will
have better capacity to create credit.
v. Economic conditions
• During depression, there is fall in business activities
and therefore there is less demand for bank credit.
Hence the banks will be in a position to create less
credit. But during boom period, there is rise in
business activities resulting in more demand for
bank credit. This will enable banks to create more
credit.
• vi) Monetary policy of the Central Bank
• Depending upon the economic situation,
the Central bank from time to time directs
the commercial banks to follow a liberal
or tight credit policy. So the monetary
policy of the Central bank sets a limit on
the capacity of banks to create credit.
• vii) Availability of borrower
• There should be sufficient number of
borrowers to create credit by commercial
banks. Therefore availability of borrowers
is a preventing force in the process of
credit creation.
viii) Behavior of other banks
• If some banks do not grant loans to the
extent required of the banking system,
the credit expansion will be restricted.
ix) Attitude of people
• If the public decide to hold more cash due
to uncertainty about economic
conditions, they would draw a large part
of deposits. As a result, banks are left
with very low cash reserve which
restricts the capacity to create credit.
 Reserve Bank of India
• The Reserve Bank of India (RBI) is the
central bank of India. It is the apex
financial institution that regulates the
monetary system in the country.
• RBI was established on the
recommendations made by Hilton Young
Commission in 1926.
• It was the commission that suggested
the name “Reserve bank of India” and
constituted by passing the RBI Act in
1934 and commenced its operations
from April 1 1935.
 Stricture and Management

• As per the Act, the

organizational structure of the
bank consists of
a. The central board
b. The local board
 Central Board
RBI is Managed by the central board comparing of 20
members as follows
• One governor who is the chairman of the central
board appointed by the central government for a
period of five years
• Four deputy governors appointed by central
government
• Four Directors nominated by the central government
for each of the four local boards
• 10 directors nominated by the central government
representing various field of business, industry,
finance and co-operation.
• One government official nominated by the central
government, usually the secretary, ministry of
finance
 Local Boards
• The RBI has four local boards in four
regions –western, the Eastern, the
northern and Southern parts of India
• These local boards are head quartered
in Mumbai, Kolkata, New Delhi and
Chennai
• The central government nominates five
members on each local board for a
tenure of four years
• The chairman of each local board is
elected from among members
 Functions of Local
Boards
i. To advice the central board of
directors on each matters of
local importance as may be
generally or specially referred
to them
ii. To perform such functions which
may be assigned to them by the
central board.
 Objectives of RBI
• To integrate the monetary policies of RBI and fiscal
policies of the government
• To issue currency and foreign exchange reserves of
the country
• To remain free from political interference and be
successful in operations for maintaining financial
stability and credit
• To set up institutions arrangements to mobilize saving
from the public by developing good banking habit
• To develop adequate banking and credit facilities in
the country
• To establish specialized institutions that fulfil the
credit needs of agriculture and allied activities
• To set up institutions to finance and industry
• To extent support to government in its efforts to
accelerate economic development in the country
Functions of Central bank with
reference to RBI
• Reserve Bank of India is the
central bank of India.
• RBI performs all the traditional
functions of a commercial bank.
• Besides these, it carries out a
number of development and
promotional functions. They are
summarized below.
1. Issuing Currency Notes
• The RBI has the monopoly of issuing currency
notes in India, except one rupee notes and
coins which are issued by the Ministry of
Finance, Government of India.
• RBI issues and distributes currencies through
it's two major departments viz, issue
department and banking department.
• The issue department is entrusted with the
task of proper and efficient management of the
note issue.
• The issue department maintains currency
chests with the branches of the SBI group,
government treasuries and sub treasuries and
public sector banks.
• Currency chests are boxes where stocks of notes
and coins are kept. The Banking department of
RBI manages seasonal fluctuations in currency
circulation.
• Whenever currency circulation declines the
banking department transfers eligible securities
to the issue department, on the basis of which
the issue department issues more currency
notes.
• RBI follows Minimum reserve system of note
issue. According to this system, RBI has to keep
a minimum reserve of Rs. 200 crores, out of
which Rs.115 crores are to be kept in the form
of gold reserves and Rs.85 crores in the form of
foreign exchange reserves.
2. Banker to the Government
• RBI acts as a banker to both the central government and state
governments. As a banker to the government it provides the
following services:
• It maintains and operates the deposit account of the central and
the state governments.
• It receives and makes payment on behalf of the central and state
governments.
• It manages public debt and the issue of new loans and treasury
bills of the central government.
• It advances money to the central government in times of
emergency. Loans and advances given by RBI to central
government for short period is called Ways and Means Advances
(WMA).
• It provides fund remittance facilities to central and state
government.
• It acts as an advisor to the government on all financial matters,
formulation of five year plans, resource mobilization etc.
• It represents government of India as a member of IMF and World
Bank (IBRD).
3. Banker's Bank
• Being the apex financial institution in the
country, RBI controls and regulates the activities
of all scheduled commercial banks in India. In the
following areas RBI acts as banker's bank.
• a) It keeps reserves of commercial banks.
• It serves as lender of last resort by meeting the
immediate cash requirements of commercial
banks.
• It provides clearance and remittance facilities to
commercial banks at centres where it has offices
or branches.
• It rediscounts the eligible bills of commercial
banks during the period of their financial
stringency.
4. Control and management of foreign exchange
• RBI is entrusted with the task of controlling
and managing of country's foreign exchange
reserves and to maintain the external value of
Indian rupees.
• It is the RBI that controls the receipts and
payments of foreign currencies.
• Foreign currencies received by persons in India
are required to be sold and exchanged for
Indian currencies either to RBI or to it's
approved commercial banks.
• Similarly, foreign currencies are allowed to
importers and travelers going abroad by RBI or
by authorized commercial banks in accordance
with the rules framed by RBI.
5. Credit control
• RBI controls the availability of credit in the
Indian economy. It is the commercial banks
that make the credit available in the
economy.
• Since the commercial banks are controlled by
RBI, it is easy to exercise control over the
volume of credit available in the economy by
controlling the activities of commercial
banks.
• RBI exercises credit control through a
number of measures.
• These measures are explained later in detail
in this chapter.
Collection of data and their publications
• RBI collects statistical data and economic
information through it's department of economic
analysis and policy. This department conducts
research and reviews financial and banking
conditions in the country.
• It compiles data on economic matters like money,
finance, credit, industrial production, prices etc.
• The data so compiled are published in it's various
publications.
• Reserve bank of India bulletin (monthly), Report on
trend and progress of banking in India (annual) are
some of the popular publications of RBI.
• In short, RBI is engaged in the collection and
dissemination of vital economic and financial data
and information.
Other development and promotional functions
• Besides the above functions, RBI is engaged in other
development and promotional functions as follows:
• Providing training facilities to banking personnel at
different levels through various training institutions
set up by RBI.
• RBI channelizes credit to priority sectors like
agriculture, small scale industries, exports etc.
• It makes institutional arrangement for rural and
industrial finance by setting up various cells and
institutions under it's control.
• It assists the government in economic planning and
takes suitable steps to improve the working of Indian
money market.
• RBI appoints committees, from time to time, to
enquire into the problems of money and banking and
to suggest measures to resolve them.
Monetary Measures
• One of the factors responsible for increase in aggregate
demand is liberal monetary policies by the central bank of a
country.
• As a result of liberal monetary policy bank credit becomes
cheap resulting in increased supply of money in the
economy.
• The purpose of monetary policy in controlling inflation is to
reduce the supply of money in an economy which will
ultimately reduce the aggregate demand and price rise.
• Monetary policies adopted by the central bank of a country
are explained in detail under the topic — functions of central
banks.
• The monetary measures which are widely used to control
inflation are divided into (a) traditional and (b) non-
traditional measures.
• (a) Traditional measures — The traditional measures of
inflation control include the following measures.
1. Bank Rate Policy (BRP)
• When the central bank feels that there is
more supply of money in the country, it
raises the bank rate so that the cost of
borrowing of the commercial banks
increases.
• This will result in increase in the cost of
borrowing by the public and demand for
money declines.
• As a result, flow of money from the
commercial banks to the public reduces.
• Therefore price rise is halted to the
extent it is caused by bank credit.
Variable Reserve Ratio
• When the central bank feels that there is
more supply of money in the country, it will
increase the Cash Reverse Ratio (CRR).
• CRR is the ratio of reserves kept with the
central bank in proportion to the total
deposits of a commercial bank.
• When CRR is increased, the lending
capacity of commercial banks declines and
therefore the money circulation in the
country gets reduced.
• This halts the rise in prices to the extent it
is caused by bank credit.
Open Market Operations (OMO)
• OMO refers to sale and purchase of government securities
and debts by the central bank to and from the public.
• During times of inflation, the central bank sells the
government securities to the public through the authorized
commercial banks and through this the central bank
withdraws a part of the deposits available to the banks for
lending.
• This causes a reduction in the flow of credit to the public.
• b) Non-traditional measures
• The non traditional methods of monetary control used by
• RBI include the following.
• Statutory Liquidity Ratio (SLR)
• Selective credit controls (qualitative credit controls)
• (For explanation to non-traditional measures please refer
the topic — functions of central bank)
 Banking Ombudsman Scheme

• Banking Ombudsman Scheme was introduced

by RBI in June 1995 and revised in 2002 and
2006.
• It is meant for the redressal of grievances of
the public against banks relating to deficiency
in banking services, loans and advances and
other related matters.
• All scheduled commercial banks, Regional Rural
Banks and scheduled primary co-operative
banks are brought under this scheme.
• The new scheme 2006 provides for online
submission of complaints.
• Ombudsman is an officer appointed by RBI to
perform the functions entrusted to him
under the scheme.
• He must be a person who has an outstanding
knowledge in the field of law, banking,
financial services and public administration.
• He will be appointed for a period not
exceeding 3 years but eligible for extension
for a period of 2 years subject to attainment
of 65 years.
• He is required to spend his whole time to the
affairs of his office.
Objects of Banking Ombudsman
Scheme
• The object of the scheme is to
enable redressal of complaints
relating to provision of banking
services and to facilitate the
satisfaction, or settlement of
such complaints.
Nature of Complaints
• The nature of complaints that can be
entertained by ombudsman is clearly specified
in the scheme. He can entertain all the
complaints concerning the deficiency in
banking services. Some of them are:
1. Non-payment or undue delay in the payment
or collection of cheques, drafts, bills etc.
2. Non-issue of drafts to customers.
3. Failure to comply with the prescribed
working hours.
4. Non-acceptance of small denomination notes
without sufficient reason.
5. Failure to honor guarantee or letter of
credit commitments by banks.
6. Complaints relating to the operation of
savings, current or any other types of
deposits kept with the bank. The complaints
may be delay, failure to give credit proceeds
to parties accounts, non-compliance of RBI
directions relating to rate of interest on
deposits etc..
7. Complaints from exporters in India such as
delay, collection of export proceeds, handling
of export bills, collection of foreign bills etc.
8. Any complaints from Non-Resident
Indians relating to the remittance of
money from abroad to India.
9. Failure to comply with the RBI
directions regarding interest rate on
loans, delay in sanctioning loans etc.
10. Non-adherence by a bank to the
instructions of RBI relating to ATM/
debit card operations or credit card
operations.
Settlement of Complaints by Ombudsman
• Banking Ombudsman is a quasi judicial
authority.
• It has the power to summon both the
parties-bank and its customer, to
facilitate resolution of complaints
through mediation.
• The complaints received by the banking
ombudsman can be redressed in three
ways as follows;
a. Settlement by agreement
• On receipt of a complaint the banking
ombudsman shall send a copy of the
complaint to the bank concerned.
• Under this method, the ombudsman acts
as a mediator between the complainant
and branch office of the bank against
which complaint is given.
• The role of ombudsman is that of a
facilitator in settling the complaints
amicably between the parties concerned.
b. Settlement by recommendation
• If the complaint is not settled within a period of one month
from the date of receipt of complaint, the ombudsman can
make a fair and impartial recommendation and it is
communicated to the complainant.
• The complainant may or may not accept the
recommendations. Whether he accept the recommendation
or not, the matter has to be informed to the ombudsman
within two weeks of receipt of recommendation.
• If it is accepted by the complainant, the ombudsman shall
send a copy of the acceptance to the bank concerned.
• The banker may or may not accept the recommendation
and in both cases, the matter has to be communicated to
the ombudsman within two weeks. If it is accepted by the
bank the complaint is dismissed.
c) Settlement by award
• If a complaint is not settled by agreement or
recommendation within a period of 2 months from the date
of receipt of complaint, the ombudsman shall inform the
parties concerned of his intension to pass an award. He
will pass an award only after giving an opportunity of
being heard to the parties concerned. A copy of the award
will be sent to the complainant and the bank. If the award
is not accepted by the complainant, the bank need not
have to comply with the award prescribed by the
ombudsman. On the other hand, if the award is accepted
by the complainant, the bank has to comply with the award
of the ombudsman, failing to which the matter will be
reported to RBI by the Banking ombudsman. If the
complainant is not satisfied with the award, he can
approach the appellate authority against the banking
ombudsman decision. The appellate authority is a deputy
governor of RBI.