BANK SECURITIES
India's banking system evolved from indigenous lending to a technologically advanced industry.
Modern banking began in the late 18th century with banks like the Bank of Hindustan. The
Presidency banks merged to form the Imperial Bank of India (1921), succeeded by the Reserve
Bank of India (RBI) in 1935. Initially, banks primarily accepted deposits and provided loans, with
early understanding treating deposits as the depositor's property. The practice of lending
deposits for profit evolved legally, leading to current and time deposits based on withdrawal
terms.
Meaning of Bank
A bank is a financial institution that deals with money. It accepts deposits from the public and
uses that money to lend or invest. These deposits can be withdrawn by cheque, draft, order or
other means. Banks also act as intermediaries between those who have money (depositors)
and those who need it (borrowers).
Bank securities
Bank securities are tradable financial instruments issued or held by banks that represent
ownership (equity) or debt claims, which can be bought, sold, or traded in financial markets.
These securities serve as investment vehicles and sources of capital for banks and investors.
The following are securities issued by banks
1. Bank notes
A banknote is a negotiable promissory note issued by a bank, payable to the bearer on demand.
The amount is stated on the note. Banknotes are legal tender and, along with coins, form
modern money. They are also called a 'bill' or 'note'. A bill is a security representing the bank's
obligation to pay a specific amount to the note holder. Essentially, a bank bill is similar to a
deposit and is issued by the bank to a client based on funds deposited.
➔ Issue of Bank notes
According to the RBI Act of 1934, the RBI has the sole right to issue banknotes in India. The
Central Government circulates rupee coins and one rupee currency notes through the RBI. One
rupee notes are signed by the Finance Secretary of the Ministry of Finance.
Banknotes are issued in denominations specified by the Central Government on the
recommendation of the RBI and are signed by the Governor of the RBI.
RBI-issued notes are "Bank notes," while one rupee notes are "Currency notes." All banknotes
are legal tender and guaranteed by the Central Government. The RBI's Issue Department
manages note issuance, maintaining reserves in gold, foreign securities, rupee coins, and
government securities. The reserve must be at least Rs. 200 crores, with gold holdings at least
Rs. 115 crores. The RBI can reduce foreign security holdings with the Central Government's
approval.
2. The Nature And Classification Of Deposits
Banks currently perform two functions with deposits: keeping deposits and currency functions.
A. Deposits with Banks
➔ Deposit of Money:
Money deposited in a bank immediately becomes the bank's property, creating a credit for the
depositor who can withdraw legal tender on demand or after a set time.
Depositors generally cannot reclaim the exact currency deposited. Common deposit account
types include savings, current, fixed, and recurring, representing a significant bank liability.
➔ Deposit of Securities:
Securities can also be deposited with banks for safe-keeping, for which banks offer secure
facilities like safes and strongrooms. These deposited securities are always kept separate and
are returned to the depositor when requested. The bank acts as an agent and doesn't own the
securities; it's more like a trustee for the customer's valuables. The customer remains the
owner. This is unlike depositing money, where the bank becomes the owner of the funds.
Offering this safekeeping service brings in fees for the bank, though it's not a primary banking
function.
B. Types of Deposits
Traditionally, banks in India have four types of deposit accounts, namely current Accounts,
Savings Banking Accounts, Recurring Deposits and Fixed Deposits including interest Warrant
Accounts.
1. Current Accounts
Current Accounts, also known as 'deemed deposits' or 'demand liabilities', are primarily for
businesses, not for investing or saving. These deposits offer easy access to funds due to their
high liquidity and there are no limits for number of transactions or the amount of transactions in
a day. Most of the current accounts are opened in the name of firm/company accounts.
They offer cheque book facilities, allowing account holders to deposit various types of cheques
and drafts. Banks don't pay interest on these accounts but do charge service fees.".
2. Savings Bank Account
"Savings Accounts are designed to help people save money. There are limits on how much can
be withdrawn at once and how many withdrawals can be made within a certain timeframe.
Banks pay interest on these deposits, with the rate determined by the Central Bank. Cheque
facilities are available. Public sector banks typically pay around 4% interest, while private banks
may offer between 6% and 7%. Since the 2012-13 financial year, interest earned up to Rs.
10,000/- on savings accounts per year is tax-exempt and for senior citizens it is up to 50,000/-."
3. Recurring Accounts
Recurring Deposit (RD) accounts, a type of Term Deposit, allow individuals to save fixed
monthly instalments for a specific period, earning interest similar to Fixed Deposits. Ideal for
regular savers, especially those with fixed incomes, RDs have maturities from 6 to 120 months.
A passbook tracks deposits and interest. Banks calculate the maturity value assuming regular
payments. Premature withdrawals are usually permitted. A minimum monthly deposit (typically
₹100) is required, and late payments may incur penalties. Accounts can be individual or joint,
with nomination available.
4. Fixed Deposit Accounts
Indian banks provide Fixed Deposit (FD) schemes, also known as Term Deposits or Bonds, with
terms from 7 days to 10 years. FDs offer fixed returns for a locked-in period, with penalties for
early withdrawal (typically ~1%). They provide higher interest rates than other deposits,
generally increasing with longer terms, and pay a lump sum at maturity.
5. Interest Warrants
Interest warrants are similar to fixed deposits, offering more frequent interest payments (monthly
or quarterly, possibly at a slightly lower rate). Modern banking systems allow for easy transfer of
FD interest to savings or current accounts, providing similar access to funds.
Changed Functions of Banks of modern times(modern banking function)
Bank draft
A bank draft is a cheque drawn on a bank's funds, guaranteeing payment to the payee. It
requires the issuer to deposit the funds with the bank, which then issues a cheque on its own
account. Bank drafts are a secure payment method, often used in transactions with unfamiliar
parties or large amounts, such as selling a home or automobile. While secure, risks include
bank insolvency or fraudulent drafts.
Traveller's Cheques
Traveller's Cheques are fixed-value drafts issued by banks or express companies, requiring the
bearer's signature at issuance and again for encashment. Historically popular for international
travel as a secure alternative to cash, their use has declined due to the rise of credit and debit
cards and ATMs. They can be cashed at the issuing bank and other designated locations upon
signature verification. Notably, they do not accrue interest, representing an interest-free loan to
the issuing institution. If lost or stolen and reported, the purchaser may not receive relief if a
branch unknowingly encashes it before receiving notification. Traveller's Cheques are
negotiable instruments with cheque-like features.
Credit Cards
A credit card, often called 'plastic money', is a small card issued by a bank to a customer with a
pre-approved spending limit. The card displays the holder's name, account number, expiry date,
and a signature panel. Upon receiving the card, the issuer verifies the cardholder's signature.
Credit cards come in various types (charge, debit, smart, restricted) and cater to different needs
with features like entertainment, cashback, travel benefits, etc. When making a purchase, the
merchant verifies the card's validity against a 'Hot list Bulletin' of lost or stolen cards. If valid, a
chargeslip is created in triplicate and signed by the cardholder. The merchant submits these
chargeslips to the issuing bank for payment, which is then settled with the merchant as per their
agreement.
Smart Cards:
Smart cards, invented by Michel Ugon in 1977, are small plastic cards with embedded circuits
for data processing, also known as Integrated Circuit Cards (ICC). These smart cards can
store extensive personal data, offering benefits such as identification in various countries,
payment for public services, business identification, electronic wallets, use in SIM cards, and
access to individual account details.
Automatic Teller Machines (ATMs)
Automatic Teller Machines (ATMs) enable bank customers to perform banking transactions,
primarily cash withdrawals, beyond banking hours. These 'cash dispensers' can be exterior (in
public places) or interior (within banks). Customers use an ATM card with a personal
identification number (PIN) to interact with the machine via a visual display and keyboard.
'Cyber banking' is a newer concept involving online payments via cards.
