• INTRODUCTION TO BANKING

• As a organization:
• Banks are commercial organizaions. Their main
goal is “GROWTH WITH PROFITS”
• Banks channelise savings of the surplus
economic units/households, create financial
instruments and pass it on to the needy units
(individuals, business organizations,Government
Sector), either for consumption purpose but
mainly for production purpose.
• Banks operate domestically as well as
internationally (either through themselves or
through Correspondent relationship).
• Banks contribute to Gross Domestic Product and
also add to international wealth.
• Traditional role of the Banks has been to procure
Deposits from the community and extend loans
& advances to individuals/business
organizations/Government sector. Also to
facilitate payment system by creating
payment/remittance system.
• With passage of time role of Bank has also
undergone a change.
• Though their traditional role of accepting
deposits, extending loans and deposits, a well
as payment system continues; they have also
taken up the role of advisory & operational
services in the field of Portfolio Management,
Mutual funds, Custodial services, Project
Financing, Housing Finance, Insurance,
• Merchant Banking .
• To undertake all the above services, most of the
Banks have formed subsidiaries of their own.
• UNIVERSAL BANKING:
• Universal Banks are one stop financial super
markets offering broad range of financial
services. The concept evolved and has been
present in European Countries for quite a long
time. In India, Universal Banking started taking
shape with ICICI’s decision to turn itself into a
Universal Bank. Both Narsimhan Committee on
Banking sector reforms and Khan Working
Group recommended a progressive move
towards Universal Banking. However, even
before ICICI decided to convert itself into
• Universal Bank, the concept was already
existing in Indian Banking Sector. SBI with its
subsidiaries SBI Homes & SBI Capital Markets
has been providing numerous financial services
under one roof as a Universal Bank. Now most
of the Banks in India either themselves or
through their subsidiaries are providing
numerous financial services and has converted
themselves into Universal Banks.
• Advantages of Universal Banks are:
convenience to customers, efficient services,
lower costs, higher output and better products.
• Disadvantages are: Monopolistic trend,
operational risk due to failure of systems,
combining commercial & investment banking
• Can give rise to conflicts of interest.
• Concept of “Narrow Banking”:
• It is just opposite to that of Universal Banking. A
narrow bank would restrict deployment of funds
to only liquid and safe Government Securities,
thereby reducing the risk of its depositors to
considerable extent (=zero or near to zero). Key
attributes of narrow banks are:
• No lending of deposits
• Extremely high liquidity
• Extremely high asset security
• Lower interest rate paid to depositors
• No derivaives
• No off balance sheet assts
• Low profit margins
• Low risk
• Low executive salaries
• TYPE OF BANKS:
• Public Sector Banks (Nationalised, SBI & its
Subsidiaries), Old Private Banks, New
Generation Private Banks, Foreign Banks,
Regional Rural Banks, Co-operative Banks
• TYPE OF BRANCHES:
• Personal Banking Branches (PBBs)
• Corporate Branches
• Mid-Corporate/SME Branches
• Industrial Finance Branches(IFBs)
• Overseas Branches (OBs)
• General Branches
• Agricultural Branches (ADBs)
• Village Branches
• CROSS SELLING:
• Traditionally Bank branches are required to
accept deposits and extend loan & advances as
also to provide remittance facilities to its
customers. However, when bank branches also
sell other products like, mutual fund, insurance,
home loan, custodial service etc. to its
• customers on behalf of its susbsidiaries or other
banks or other finance companies or financial
institutions, it is called CROSS SELLING.
Further, if a Corporate Branch sell retail products
of its bank or vice-versa, it is also called Cross-
Selling.
• TYPE OF DEPOSITS:
• (A) Demand Deposits : Savings Bank (Interest
Bearing), Current Account (Non-interest bearing)
• (B) Term Deposits : Fixed Deposits (TDR &
STDR), Cash Certificate, Recurring Deposit
• TYPE OF CREDIT FACILITIES:
• (A) FUNDED:
• (a) Working Capital Loans (Overdraft, Cash
Credit, Bill Discounting Limits) – Basically Short
Term Loans
• (B) Demand Loans, Term Loans, Corporate
Loans – Basically Medium to Long Term Loans
• (B) Non-Funded: Also called off-balnce sheet
items (Guarantees, Letter of Credits L/cs)
• INCOME & COST HEADS OF BANKS:
• Income Heads: Interest, Exchange, Commission
& Discount
• Cost Heads: Charges Account, Interest Account
• LEGAL FRAMEWORK APPLICABLE TO
BANKS:
• (a) Banking Regulation Act, 1949
• (b) RBI Act, 1934
• (c)Negotiable Instruments Act, 1881
• Important Provisions of Banking Regulation
Act, 1949:
• The Banking Companies Act was passed to
consolidate and amend the laws relating to
Banking Companies. The need for this was felt
due to:
• (a) Abuse of powers by persons controlling
some banks
• (b) Safeguarding the interest of depositors of
Banking Companies
• (c) Safeguarding the economic interests of the
Country in general
• The Act mainly deals with:
• (a) Provisions relating to Capital of Banks
• (b) Povisions relating to appointment of
Directors, Managing Agents, Chairman and their
Powers
• (c) Provisions relating to shareholding pattern
and rights of shareholders
• (d) Provisions relating to maintenance of Liquid
Assets-Reserve funds, CRR, SLR requirements
• (e) Appointment of Banking Regulator- RBI and
its powers are defined
• (f) Provisions relating to licensing requirements
• (g) Provisions relating to winding up/
amalgamation of Banking Companies
• (g) Provisions relating to Powers of Central
Government to acquire Banking Companies
• (h) Provisions relating to presentation of annual
financial statements of the Banks viz. P&L,
Balance sheet.