Unit-1

Introduction to Indian Banking System

Introduction to Indian Banking

 Bank history
 Public Sector Bank in India
 Private Sector Bank in India
 Local Area Banks (LAB)
 Pre-Reforms Development
 Lead Bank Scheme
 Co-Operative Banks
 Regional Rural Bank (RRB)
 Some Important Financial Institutions
Bank History
 Bank word derived from French “Bancus” or “Banque”
i.e., a bench
 Modern banking system began with Bank of England in
1694.
 Bank of Hindustan was first established in India in 1770.
 Three presidency bank
 Bank of Bengal – 1809 at Culcutta
 Bank of Bombay – 1840 at Bombay
 Bank of Madras – 1843 at Madras
 Later on Imperial Bank of India with merged in 1919
following banking crisis.
Bank History
 A series of banking crisis between 1913-1917 – failure of
588 banks.
 The banking companies act was passed in February 1946.
 Later amended – Banking Regulation Act, 1949.
 Meanwhile, the RBI Act 1934 was passed
 RBI became the first central bank of the country w.e.f. 1-
4-1935.
 It was nationalized on 1-1-1949
 The Imperial bank of India was partially nationalized in
1955 in the form of State Bank of India.
 In 1959 Subsidiaries of SBI 7 state banks.
Public Sector Bank
 Banking system dominated by nationalized bank
 The 14th private owned bank became nationalized
on 19th July 1969 by Mrs. Indira Gandhi (Prime Minister)
 The objective was to ensure mass banking at
against class banking with banking infrastructure
aimed at hilly tracts and terrains of the country.
 SBI was the first public sector bank in India in 1955
under the SBI Act 1955.
 How many public sector bank in India ????
Private Banks in India
 Opening of banking sector in year 1994 as a
liberalization program
 HDFC was amongst the first to receive an ‘in principle’
approval in march 2005.
 It plays crucial role in enhancing customer oriented
product to innovate and complete in the process.
 Certain guidelines
 Important shareholders – allotment and transfer of share
 The Directors and CEO manager the banking affaires
 Minimum capital/net worth
 Policy and process are transparent and fair
Local Area Banks (LAB)

 It was launched by RBI on 24/8/1996

 Purpose of developing backward and less
developed districts.
 The LAB’s are allowed to open branches in
rural and semi-urban areas for operations
Pre Reforms Development
 Lead Bank Scheme (FKF Nariman Committee) 1969 Dec.
 The country divided into 338 districts distributed among major
scheduled banks
 Public sector to play lead role in coordinating efforts
 Credit institutions, planed growth, branch network,
development.
 Progress of the branches - returns to be submitted to lead bank
▪ Lead Bank return-1: Service area credit plan before 26 th Feb. Annual
▪ Lead Bank return-2: Service area operation scroll- Monthly
▪ Lead bank Return U2: Modified LBR-2 submitted once in quarter
▪ Lead Bank Return-2 : Service area recovery and outstanding statement
▪ (A) Deposit and Advance Position quarterly
▪ (B) Outstanding – Half yearly
▪ (C) Statement of recovery of priority sector advances – details of demand, collection
and balances- annual basis.
Pre Reforms Development

 Co-Operative Banks
 Long way – Enactment of Agricultural Credit Co-
Operative Societies Act in 1904.
 Important instruments of banking – to the rural masses
and vehicle for democratization of the financial system.
 It mobilize deposits – upliftment of the weaker sections
and subsidy programs for the poor.
 Two types – Urban Cooperative banks and rural
cooperative credit institutions.
 Rural Financial Institutions
Pre Reforms Development
 Regional Rural Bank (RRB)
 On the recommendation of Narasimham Committee, the concept of RRB
was introduced in India in 2nd Oct 1975 in 5 states.
 Majority of the branches of RRB are located in rural areas.
 196 RRBs operating in 26 states across 518 districts with 14.446 branches
as on 31st March 2004
 57 RRBs operating in India as on 19/2/2014
 It specialized for rural financial institutions for creating to the credit
requirements of the rural sector.
 Maximum authorized capital 5 cr. – minimum 25 lacs to 1 cr.
 Share capital : Central Govt. – State govt. – Sponsoring Bank (50:15:35)
 RBI Supported – Efficient management, Training to staff,
computerization, networking
 Pre Reforms Development
 Some Important Financial Institutions
 National Bank for Agricultural and Rural Development (NABARD)- 1982
 Export Import Bank of India (EXIM Bank)- 1982.
 National Housing Bank (NHB) -1988
 Housing and urban Development Corporation Ltd. (HUDCO) – 1970.
 Housing Development Finance Cooperation (HDFC)
 Industrial development Bank of India (IDBI) – 1964.
 Industrial Finance Corporation of India Ltd. (IFCI)
 ICICI
 Small Industries Development Bank of India (SIDBI) – 1990
 Infrastructure Development Finance Co. (IDFC) -1997
 Power Finance Corporation (PFC) – 1986
 LIC & GIC
 Deposit Insurance and Credit Guarantee Corporation Ltd. - 1962
Reserve Bank of India (RBI)
 It was established on the basis of recommendations of
the Hilton Young Commission.
 RBI Act 1934 (II of 1934) provides the functioning of the
bank, which commenced operations on April 1, 1935.
 The Bank was constituted to:
 Regulate the issue of bank notes
 Maintain reserves with a view to securing monetary stability
 To operate the credit and currency system of the country to
its advantages
 It playing a special role in – development of banking
system and agriculture.
Reserve Bank of India (RBI)

 The preamble of the RBI describes its basic functions as:

 “ ----- to regulate the issue of Bank Notes and keeping of reserves with a view to

securing monetary stability in India and generally to operate the currency and credit
system of the country to its advantages.”
 With liberalization, the bank’s focus has shifted back to core central banking

functions
 Monetary Policy

 Bank Supervision and Regulations

 Overseeing the Payment System

 Developing financial markets

Reserve Bank of India (RBI)
 RBI owns four subsidiaries namely
 National Housing bank (NHB)
 NABARD
 Deposit Insurance and Credit Guarantee Corporation of India
(DICGCI)
 Bharatiya Reserve Bank Note Mudran Private Limited
(BRBNMPL)
 Official and non-official directors of RBI are appointed
by the Government of India for a period of four years.
 The existing currency office – Kolkata, Mumbai,
Chennai, Rangoon, Karachi, Lahore and Kanpur
RBI – Legal Framework

 Umbrella Acts which form the basis of its very

foundation
 Acts which govern the specific functions of
the apex body
 Acts which govern the Banking Operations
 Acts which govern the individual institutions
RBI – Legal Framework

 Umbrella Acts
 Reserve bank of India Act 1934, governing RBI
Functions
 Banking Regulation Act 1949 which governs the
financial sector
RBI – Legal Framework

 Acts govern the specific functions

 Public Debt Act, 1944/Government Securities Act
which relates to Government debt market
 Securities Contract (Regulation) Act, 1956 which
regulates government securities market
 Indian Coinage Act, 1906 which governs currency
and coins
 FERA, 1973 / FEMA, 1999 which governs trade and
foreign exchange market
RBI – Legal Framework

 Acts Governing Banking Operations

 Companies Act 1956 which govern banks as companies
 Banking Companies (Acquisition and Transfer of
Undertakings) Act 1970/1980 which relates to
nationalization of banks
 Bankers’ Books Evidence Act which forms the basis for
evidences in competent courts of law
 Banking Secrecy Act which governs all concerned in
the banking industry
 Negotiable Instruments Act 1881
RBI – Legal Framework

 Acts Governing Individual Institutions

 State Bank of India Act, 1954
 The Industrial Development Bank (Transfer of
Undertaking and Repeal) Act, 2003
 The Industrial Finance Corporation (Transfer of
Undertaking and Repeal) Act, 1993
 National Bank of Agricultural and Rural Development
Act
 National Housing Bank Act
 Deposit Insurance and Credit Guarantee Corporation Act
Main Functions of RBI

 Maintenance of Price Level / Price Stability

 Prime responsibility to formulate, implement and
monitor monetary policy
▪ Provision of appropriate liquidity- credit growth, support
investment and export demand – equal emphasis on price
stability
▪ An interest rate – macroeconomic and price stability with
growth movement
▪ Measures in a calibrated manner, in response to evolving
circumstances with a view to stabilizing inflationary
expectations.
Main Functions of RBI

 Regulator and Supervisor of the Financial System

 Public confidence – emerge effective financial system –

Well monitored and guided.

 Board parameters of banking operations

 Monitor the functions of commercial banks and financial

institutions to protect the interest of the public

 Cost effective banking services to the public
Main Functions of RBI

 Manager of Foreign Exchange

 FE reserve the strength of the economy
 Facilitate external trade
 Mobilization of foreign exchange is indispensable,
equal measure, management
 Manage with the help of FEMA, 1999.
Main Functions of RBI

 Issuance and Replacement of Currency

(Notes & Coins)
Management of currency is one of the core function
 Objective: to give the public adequate quantity of
supplies of currency notes and coins and in good
quality
 Policy and system to forecast the demand for fresh
bank notes and coins
 Issues and exchanges or destroys currency and coins
not fit for circulation.
Main Functions of RBI

 Developmental Role
 Performs a wide range of promotional functions
to support national objectives.
 Related Functions
 Banker to the Government: performs merchant
banking function for the central and the state
governments; also acts as their banker.
 Banker to banks: maintains banking accounts of
all scheduled banks.
Different Types of Accounts

 Current Account
 Saving Account
 Regular Savings Account
 Women's Savings Account
 Senior Citizens Account
 Institutional Savings Account
 Salary Account
 Recurring Deposit Account
 NRI Account
Different Types of Accounts

1. Hindu Undivided Family (HUF)

 Hindus, Sikhs & Jains can form HUF
 Make member by birth or adoption
 Senior most member is the karta
 Is not govern by partnership act
 Document to be signed by the karta
 Karta can be
▪ Compromise and refer to arbitration
▪ Give valid discharge to debt and make part payment
▪ Enter into partnership and delegate authority to operate the
account to any one
Different Types of Accounts

2. Married Women
 A separate legal entity
 Can rise loan against her own property
 Solvency not related to her husband
 Husband liable for her debts if
▪ Has consented and stands surety
▪ Loan is availed for necessities of her life
 Can be executor or administrator without any help
or guidance
Different Types of Accounts

3. Illiterate Persons
 Get introduction and witness
 Photograph to be changed every 3 years
 Take identification mark
 Payment only in person through cashier only
 In case of any dispute, take independent witness
 Noting ‘Illiterate A/c’ to be made in ledger folio/A O F.
4. Blind Persons
 Same as all above point
 Payment/Receipt to be got witnessed by an independent person
 Noting ‘Blind Person’ to be made on ledger folio/A O F
 Advised to open joint account.
Different Types of Accounts
5. Minor Account
 Under the guardianship of M/F/LG
 No loan provide
 Under NIA can bind all others except for himself
 Minor can be admitted only to the benefit of partnership
 Minor can be appointed as an agent but shall not be personally
responsible to his principal who shall be responsible for the acts of the
minor agent.
6. Joint Accounts
 Appointment of an agent should be confirmed by all
 Any one can stop payment
 Alteration in a cheque drawn should be confirmed by the drawer itself
 Operations to be stopped in case of death, insolvency/insanity of any one.
Different Types of Accounts

7. Partnership Firms
 Max no of partners 20 (10 in banking)
 Registration not mandatory, but only r3egistered firm can file suits
to enforce a contract
 Death of partner/admission of a partner dissolves the partnership
firm
 Implied authority does not cover:
▪ Open a/c in his name for firm’s business
▪ Acquire / transfer immovable property
▪ Enter into partnership on behalf of the firm
▪ Admit any liability in a suit against the firm
▪ Submission of a dispute to arbitrations
▪ Withdrawal of suit field on behalf of the firm
Banker Customer Relationship

 Who is a banker?
 Who is a Customer?
 Relationship between them
 Obligations/Duties of Banker
 Right of Banker
 Who is a Banker?
 The Banking Regulation Act 1949 defines
“Banking as accepting for the purpose of leading or
investment of deposits of money from the public,
repayable on demand or otherwise and withdrawal by
cheque, draft order or otherwise (section 5b) and says
that any company which transacts the business of
banking is a banking company (section 5c).
Bank/Banker/Banking company performs two functions
1. Accept deposits from public
2. Uses such deposits for the purpose of lending or
investment
Who is a Customer?
 A customer is one who has a
(saving/current/fixed) deposit account
irrespective of its debit or credit balance with
the bank.
 A customer is a person, whose money has been
accepted on the footing that the banker will
honor drawing up to the amount standing to his
credit irrespective of his connections being of
short or long standing.
 Relationship between Banker & Customers

1. Debtor-Creditor: when bank accept deposits become

debtor and depositor a creditor- respective of bank pay
interest or not.
Some features:
 Not claim same note or coins but equivalent amount
 For repayment the creditor must raise demand
 Demand must be maid by customer in prescribed manner at
branch where he(s) operate their account with in business
hours and day
 The depositor being a creditor is an unsecured creditor
notwithstanding – are insured upto rs. 1 lac per depositor by
DI & CGC.
Relationship between Banker &
Customers

2. Trustee- Beneficiary: bank may also act as trustee.

 A person having no account with a bank- deposit with
instruction to retain it till further instruction
 Managers properties of its customer
 The customer instruct a bank to debit his account or
deposit an amount for utilizing specific purpose or for
remitting to other branch/bank
3. Agent-Principal: accept bill on behalf of customer
4. Bailee - Bailor: accept article for safe custody
5. Lessor-Lessee: Locker
Obligations/Duties of a Banker

 To honour cheque of its customer – condition

Sec 31 of NI Act
 Payment of cheque
 Account can not be closed unilaterally- reasonable
notice
 Erroneous Credit: bank cannot refuse to credit it
into the customer, without the customer’s specific
authority
 Pass Book / Statement of Account: No obligation
to examine – correct or inaccurate
Obligations/Duties of a Banker
 A banker is obliged to mantain secrecy of the state of
accounts- if required to do
 By law
 In public ineterest
 In bank’s interest
 As per consent of the customers
Under compusion of law
▪ Banker’s Book evidence Act 1891
▪ Code of civil/Criminal procedure
▪ Company Act 1956
▪ Tax Law
▪ Call for any information from bank as per RBI Act or BR Act
Obligations/Duties of a Banker

 The bank is responsible to the customer for

fraud committmed by its employees
 An instrument with forhed signature is to
mandeate at all and hence bank cannot debit
its customers account
 While giving standing instructions the
customers undertakes to mantain sufficient
balance in account.
Right of Banker

 Bankers Lien: means right to retain goods in

possesion (but not to sell) until debit is
dischnarged
- in general pledge – right to sell
 Right to Set-off: right to combine two or more
accounts
 Right to Appropriation:
 Right to charge interest, service charges, etc.
▪ Termination of relationships
▪ Garnishee order and attachment order
Customer Service in Banks

 Implementation Of Various Measures By

Bank
 Products & Services Provided By Bank
 Banking Ombudsman Scheme 2006
 Purpose Of Banking Codes & Standards
Boards Of India (BCSBI)