UNIT 1:

INTRODUCTION
TO BANKING
 ORIGIN OF BANKING IN INDIA
The history of banking in India can be broadly classified as:
• Pre-independence Phase (1770-1947)
• Post-independence Phase (1947-till date
The second phase can be further divided as:
• Nationalisation Phase (1947-1969)
• Post-nationalisation Phase (1969-1991)
• Liberalisation Phase (1991-till date)
 ORIGIN OF BANKING IN INDIA
• In India, modern banking originated in the middle of the 18th century.
• The first banking institution was the Bank of Hindustan established in 1770 and it was the
first bank at Calcutta under European management. It was liquidated in 1830-32.
• In 1786 General Bank of India was set up but it failed in 1791.
• Calcutta developed as a banking hub since it was India’s busiest port for trade, mostly
because of the British Empire’s trade.
• The British East India Company granted the Bank of Calcutta, Bank of Bombay, and Bank
of Madras licenses to establish the three Presidency banks. For long years, they operated in
India as if they were central banks.
• The Bank of Calcutta established in 1806 immediately became the Bank of Bengal.
• These three banks joined in 1921 to become the Imperial Bank of India.
• Later, in 1955, the Imperial Bank of India was nationalized in 1955 and was
named The State Bank of India, which is currently the largest Public sector
Bank.
• Before the Reserve Bank of India was founded in 1935 under the Reserve
Bank of India Act, of 1934, the presidency banks and their successors served
as quasi-central banks for a long time.
• Consequently, the State Bank of India is the country’s oldest bank.
• During this time, as many as 600 banks were founded.
• Many large banks were unable to function because of a lack of management
expertise, equipment, and technology, which resulted in laborious procedures
and mistakes made by humans, making Indian account holders vulnerable to
fraud.
• A few banks have endured and are still around today like the Allahabad Bank
(1865), Punjab National Bank (1894), etc.
 History of Banking in India:
Post-independence phase (1947-1991)

• After being established in 1935, the Reserve Bank of India was nationalized
in 1949 and given the authority to oversee, govern, and inspect all banks in
India.
• All of India’s main banks were privately run at the time of independence,
which raised concerns because rural residents were still reliant on
moneylenders for financial support.
• The then-Government chose to nationalize the banks to address this issue.
 Nationalization of banks

• The Government of India issued the Banking Companies (Acquisition and Transfer of
Undertakings) Ordinance in 1969 and nationalized the 14 largest commercial banks in
India at that time-
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
• In 1959, 7 subsidiaries of SBI were nationalized:
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.
In the year 1980, another 6 banks were nationalized, taking the number to 20 banks
• In India, nationalizing banks marked a turning point toward financial stability, particularly in rural
areas where there were no big banks. The efficiency of the financial sector in India was enhanced by
the nationalised banks.
The step has a huge impact on the financial system of the country-

• When branches were established in the farthest reaches of the nation, bank access improved.
• Since more people had access to banks as a result of the opening of new branches, the average
domestic saving increased by two times.
• A comparable rise in public deposits resulted from the expansion of banks’ reach, which aided the
expansion of export-related sectors, agriculture, and small businesses.
• Improved effectiveness and more public confidence were the results of greater accountability.
• The economy expanded significantly as a result of the small-scale industries’ boost.
• After being nationalised, RBI had already established a precedent by ranking among the biggest
employers. As more banks followed the lead, this continued.
• Banks provide financing to marginal farmers at reasonable rates, which significantly boosted India’s
agricultural industry
 Liberalization (1991)
• To increase the involvement of private and foreign investors, the
Government implemented economic liberalization in 1991, which resulted in
a significant change in its economic policies.
 Definition of Banking
• In the words of Crowther, “The banker’s business is then, to take debts of
other people, to offer his own in exchange and thereby to create money”. He
further says that 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”.
• Section 5(b) of the Banking companies act,1949 defines banking as
"accepting for the purpose of lending or investment of deposits of money
received from the public ,repayable on demand and withdrawable by cheque ,
draft, order or otherwise".
 Banker and Customer Relationship
• Debtor- Creditor (Bank is a Debtor and Customer is a Creditor)- On the opening of
an account, the banker assumes the position of a debtor. A depositor remains a creditor of
his banker so long as his account carries a credit balance.
• The relationship with the customer is reserved as soon as the customer account is
overdrawn.
• Banker becomes a creditor of the customer who has taken a loan from the banker and
continues in that capacity till the loan is repaid.
• The demand should be made in a proper manner. The customer should demand payment
not verbally or by a mere telephone call but by cheque, draft, withdrawal form, order or
otherwise. Further, demand should be made during the working days and working
hours under section 25 and 65 of Negotiable Instruments Act, 1881, respectively.
 Banker and Customer Relationship
• Creditor- Debtor (Bank is a creditor and Customer is a Debtor)- When
the bank lends money to the customer, the customer is the borrower and the
bank is the lender. The relationship between the banker and the customer is
therefore that of a creditor and a debtor.
 Relationship As Trustee And Beneficiary

• Ordinally a banker is a debtor of his customer in the respect of the deposit

made by the latter but in certain circumstances, he acts as trustee also.
• A trustee hold holds money or asset and performs certain functions for the
benefit of some other person called the beneficiary.
 Relationship as Bailee and Bailor (Bank-
Bailee and Customer- Bailor)
• As per the section 148 of the Indian Contract Act, 1872, a bailment is a
contract where one person delivers goods to another person for some
purpose. The person delivering the goods is the Bailor and the person
receiving the goods is the Bailee. After the accomplishment of the purpose,
the Bailee needs to return these goods to the Bailor or dispose of them
according to the directions of the Bailor.
 Relationship As Pledger And Pledgee

• The banker performs the relationship of Pledger and Pledgee when the customer
took the loan from the bank and deposits some security to the banker. The
customer becomes a pledger and the bank is pledgee. The security of the customer
will remain in the custody of the bank until the person repays the money from the
loan taken by him from the bank.
• In this context, a pledge is a legal agreement in which a borrower (the pledger)
gives the lender (the pledgee) the right to take possession of and sell the specific
property (the collateral) if the borrower defaults on the loan. This type of
arrangement is commonly used in secured lending, where the borrower is required
to provide collateral in order to secure the loan.
 Relationship As Principal And Agent

• The bankers provide agency services to their customers. The agent is defined under
section 182 of the Indian Contract Act as the agent is the person who is employed
by a person by giving him the power of attorney to work or deal on his behalf. The
banker pay taxes, electricity bills, insurance premium etc. at the command of the
bank customer who acts as principal. The bank usually charges for these services
provided by the bank to its customers.
• In the banking industry, the relationship between a banker and a customer can be
considered as a principal-agent relationship. In this type of relationship, the
customer (the principal) entrusts the bank or the banker (the agent) with their
money and other financial assets, and the bank or the banker acts on the customer’s
behalf to manage and invest those assets.
 Relationship As Principal And Agent

• The customer, as the principal, is the party who has the ultimate control over
their assets and makes the final decisions on how they should be managed.
The bank or the banker, as the agent, is the party who is responsible for
executing the customer’s instructions and managing their assets in
accordance with the customer’s wishes.
• The bank or the banker has a fiduciary duty to act in the best interests of the
customer and to use reasonable care, skill, and diligence in managing the
customer’s assets.
 Relationship As Lesser And Lessee
• Section 105 of the Transfer of property act deals with the contract of
lease. It is a transfer of a right to enjoy the immovable property for a certain
time with consideration.
• This happens in the relationship between banker and customer when the
bank provides a safe deposit locker to the customer of the bank to save his
important property for a certain period of time. The bank changes its
customer who is taking the benefit of the locker for a certain period of
time. In this context, the customer is the lessee and the bank is the lesser.
 Relationship As Advisor And Client
• The relationship between banker and customer can be as advisor and client
in a case when the customer invests in securities. The bank gives advice to its
customer for investing.
• Similarly, if you are planning to take any kind of loan, but are not sure which
loan you should take. Here, the bank can advise you officially or unofficially
to make the right decision. In that case, the banker will be your advisor and
you will be his client.
 The functions of a Banker also include:
• Maintaining Records - It is the duty of the banker to maintain every record
of the transaction, loan and investment done by the bank customer. These
records must be clear, genuine and authorized. The bank customer has the
right to check his transaction details whenever he needs them. In a case
where the transaction details are needed, the bank has the duty to provide the
true details to its customer with the stamp and signature of the authorized
person.
 The functions of a Banker also include:
• Maintain Confidentiality - A banker is responsible for the safety of the
documents, records or any other property which is deposited by the bank
customer in the bank. The information must remain confidential. However,
there are some conditions when the banker can disclose these confidential
documents saved in the bank account.
 The functions of a Banker also include:
• Obligation To Honour Cheques- The bank is responsible for accepting the Cheque of
the customer that is equivalent to the amount present in the account. There are some
necessary conditions which must be fulfilled by the Cheque. Lack of these conditions can
lead to the dishonour of cheques. Some important conditions are:
• Proper format of the Cheque
• Correctly signed by the person
• Properly presented in the bank
• There must be an available balance in the bank account.
Termination Of Relationship Between The
Banker And The Customer
• Liquidation Of The Company
• Death Or Lunacy Of A Customer
• Completion Of Contract
• Closing The Account After Bank Notice
• Voluntary Closure Of Account by Customer
• Termination By The Bank Due To Risk Assessment
• Bankruptcy Or Insolvency Of The Customer
 Who is a Customer?

Ordinarily, a customer is anyone who has a bank account, whether savings or

current, and who indulges in banking transactions.
 MINOR
• According to Section 3 of Indian Majority Act, a person attains majority at
the age of 18, except in cases where a guardian is appointed by a Court where
the age of majority is 21. According to the Indian Contract Act, a minor is
not under a legal capacity to enter into a contract and therefore any contract
with a minor is void. Thus, the minor has a guardian to maintain his / her
property.
• Normally, bankers do not open accounts in the name of the minor
individually, but open accounts in the joint name of the minor and the
natural guardian. Sometimes, the Court may appoint someone who is not a
natural guardian as minor’s guardian. In such cases the account should be in
the name of the minor and the Court - appointed guardian. Usually, the
account should be operated by the guardian on behalf of the minor.
• When the minor attains the age of majority, he/she alone can operate the
account and the guardian should not be allowed to operate the account.
The account opening form should contain details,
• Name of the Minor
• Age of the Minor
• Date of birth of the Minor
• Date of attaining majority
• Name of the Guardian
• Signature of the Guardian
 Illiterate Persons
A person who cannot read or write is considered as an illiterate person. The banker while
opening an account in favour of an illiterate person, should adopt the following procedures:
• The illiterate person will have to be introduced by an existing literate account holder of the
branch.
• The left hand thumb impression has to be attested by a judicial officer or by any witness
who is also the account holder of the bank.
• The illiterate person should not be given cheque book.
• Three passport size photographs should be obtained. One will be affixed in the passbook,
the other in the ledger and the third in the account opening form.
• Illiterate persons are the people who cannot either read or write, A banker
can always open an account in the name of the illiterate person. The banker
however needs to observe following precautions.
• Thumb impression - As the illiterate person cannot sign, it is necessary for
the banker to obtain the thumb impression of such a customer. The thumb
impression has to be compared with the thumb found on the cheques drawn
by him.
• Photograph - The banker should obtain the photograph of the illiterate
customer. The photograph will help identify the illiterate easily.
• Identification Mark - Besides the photograph, the banker should also
obtain brief details of the physical identification marks of the illiterate
customer.
 Married Woman
• An account can be opened in the name of a married woman. She has the
power to draw cheques and give discharge. But if a loan is given to a married
woman, the banker will have no remedy against her if she has no separate
means. Bank must insist for the guarantee of her husband, because the
married woman can plead for and get validated that her debts to the bank are
void if the explicit written consent of the husband is not recorded by the
lending bank. This is possible by virtue of provisions in Married Women’s
Property Act.
 Lunatics
• Under Section 1 of the Indian Contract Act, persons of unsound mind are
disqualified from contracting. But the disqualification does not apply to
contracts entered into during the periods of sanity.
• However, no banker would knowingly open an account in the name of a
person of unsound mind because he then would have to face the difficulty of
choosing whether cheque was made during a period of sanity and pay it or it
was made during a period when it was not and so dishonour it.
• If a banker receives notice and is sure that an account – holder has become a
lunatic, he should stop all operations in the account till such time the
customer becomes normal. The banker should obtain a Certificate of Sanity
from a competent authority after which such a person is allowed to operate
on the account.
• The banker has to take the following precautions on coming to know of the
insanity of the customer.
• Return Cheques - On coming to know of the unsound nature of mind of the
customer, the banker must immediately return all the cheques drawn by him with
the remark ‘refer to drawer’.
• Lunacy Order - The order of lunacy on being received from the Court should be
entered in the proper records of the banker.
• Account operation - The banker may allow the operation of the account of the
lunatic customer only on the basis of the guidance of the Court Of Law. The
customer should not be allowed to operate the account in any manner.
 Joint Accounts
• A Joint Account is an account opened by two or more persons.
• The Account Opening forms should be signed by all the joint account
holders. The names, addressed and other details of all of them should be
obtained on the Account Opening Form.
• The account – holders should also indicates how the account is to be
operated the banker should obtain specific directions as to one or more of
them will operate on the account
 Pardanashin woman
• A pardanashin lady is one who remain in complete seclusion and does not
transact with people other than members of her family.
• Though Pardanashin lady is legally competent to enter into a contract, she
may be able to avoid it on the pretext of undue influence and the onus of
proving of influence is on the bank. Therefore, bank should take extra care
in this regards.
• Signature of pardanashin lady should be attested by her guardian if she is
unmarried and by her husband if she is married. The signature may be
attested by any other member of the family also.
• If she is illiterate she will not be issued cheque book and for
every payment she will have to give the discharge in the presence of an
independent witness. However, in case of literate Woman, cheque book will
be issued and payment will be made on the basis of recorded signatures.
 Blind Person
• You need to remember that a blind person is fully competent to enter into a
contract like any other person. However, due to his physical disability, there
can be a situation where he contests subsequently that the facts were
misrepresented to him and-thereby try to avoid the contract.
• Therefore, signature or thumb impression of the blind person should be
attested by an independent witness to the effect that all terms and conditions
were properly explained to the blind person in his presence.
• Moreover, cash deposit and withdrawal by blind person should be handled
by the officer of the bank. Cheque book can be issued only if the blind
person can sign consistently.
 Insolvent
• No account should be opened in the name of an un-discharged insolvent. An
insolvent person is a person who is unable to pay his debts as they are due or
his liabilities cannot be covered by his assets is insolvent person. Such a
person who cannot pay his debts can have insolvency proceedings initiated
against him.
• Existing accounts - When a bankruptcy order is made, the bankrupt must
stop using all their bank accounts, cheque books and bank cards, and
immediately surrender them to the Official Receiver. Accounts are normally
frozen by the Bank when they learn about the bankruptcy order.
 Joint Hindu Family
• The concept of joint Hindu Family is recognized by law. When an account in the
name of the JHF is opened all the adult co- parceners are to sign the account
opening form, even though the karta would operate on the account.
• In addition, the bankers also obtain a letter of undertaking signed by all the adult
co- parceners stating that the business carried on by the family through births and
deaths will be advised to the banker. If the business is ancestral, the co- parceners
are liable to the extent of their share in the family property, whereas if the business
is not ancestral, co- parceners will be personally liable for the family from the bank.
• The account should clearly indicate that it is a JHF.
• The JHF letter should be signed by all the co- parceners.
• The letter should clearly indicates the powers of the karta.
• All co- parceners should sign the documents for loans.
• Death/Lunacy/Insolvency of co- parceners does not dissolve the JHF. It continues
till partition of property.
 Proprietorship
• A sole proprietorship is a business owned and operated by a single individual.
• It is one of India’s oldest and most popular business forms because of the
easy setting-up procedure and nominal costs. Many businesses start as a sole
proprietorship before becoming a partnership or an LLC (Limited Liability
Company).
• One can apply for any business bank account that qualify for as a sole
proprietor. Opening a business checking account can increase the chances of
getting financing and simplify cash flow management.
 Partnership
A bank should take the following precautions in the course of having business dealing with
the firm:
• The banker should open an account in the name of partnership firm only when one or
more partners make an application to the effect.
• The bank should ask for a copy of the partnership agreement and thoroughly acquaint
itself with its clauses.
• The banker should take a letter signed by all the partners containing the following:
• The name and address of all partners
• The nature of the firms business
• The names of the partners authorized to operate the account in the name of the firm.
• The banker should not credit a cheque in the firms name to the personal account of a
partner without enquiring from other partners
 Co – Operative Societies

• These are established under Co – operative socities act in force in various states.
They are governed by their respective rules and by – laws. Before opening the
accounts, these have to be scrutinized to see if there are any restrictions on opening
bank accounts.
• In some states, the co- operative societies cannot open accounts with commercial
banks without permission from the registrar of co- operative societies and the
registrar may also impose certain conditions like maximum balances. All such
conditions should be observed while opening and operating the accounts.
 Club and Association
Opening of Accounts in the name of Clubs & Associations:
• If the society or club is registered under the Societies Registration Act 1960 or
Companies Act, a copy of the Registration Certificate or the Certificate of
Incorporation should be obtained.
• The bank should obtain a certified copy of the by-laws, rules and regulations.
• A list of the members of the Managing committee is to be obtained.
• A certified copy of the resolution passed by the committee to open a bank account
together with the details of authorized signatories and instruction regarding the
operation of the account should be obtained.
• The account must be properly introduced.
• POI+ POA not only for the constituent but also for every authorized signatory are
to be obtained.
 Limited Liability Partnerships
• Limited liability partnerships (LLPs) allow for a partnership structure where
each partner’s liabilities are limited to the amount they put into the business.
• It means that if the partnership fails, then creditors cannot go after a
partner’s personal assets or income.
• A current LLP account is the first stage in an LLP’s post-registration
compliance. It is required for all types of businesses. A business requires
numerous transactions on a regular basis, and with a current account, any
number of transactions can be carried out. It is a zero-interest account. As a
result, it is advantageous to do business smoothly and without regard to the
number of transactions.
Generally accepted list of self-attested documents and details to be submitted for an LLPCertificate of Registration of
the LLP issued by registrar
• Communication of address proof of the LLP if it is different from the address mentioned on the Certificate of
Registration
• Current landline/ mobile number and e-mail ID of the LLP
• Permanent Account Number (PAN) of the entity
• Board resolution
• Latest passport-size colour photograph of each of the authorised signatories
• A copy of one valid photo identification and address proof of each of the authorised signatories
• In case POA has been granted for account operations – photograph, identity and address proof of the POA holder
should also be submitted along with the POA agreement
• Shareholding pattern/ list of beneficial owners holding more than 15% in the company either directly or indirectly
(must be on letterhead).
• PAN card/ identity proof of such beneficial owners as identified above.
• Address proof of beneficial owners as identified above.
• LLP deed agreement.
• Updated list of designated partners.
 Limited Company (Joint Stock Company)
• Limited Companies (also known as Joint Stock Companies) are governed by
the Companies Act 1956. While a company is normally incorporated under
the Companies Act, a company can also be brought into existence by means
of a statue by the Parliament or the State Legislature. While the company
consists of share- holders, its entity is separate from that of the share-
holders. For all practical purposes, the company is just like a person and can
sue or be sued in its own name.
• Companies can be broadly divided into three categories:
i) Public Limited Company: Should have a minimum of at least 7 members
(Share holders), but there is no maximum limit.
ii) Private Limited Company: Must have at least 2 members (share holders), but
not more than 200 members excluding those who are in the employment of the
company at the time of share allotment.
iii) Government Company: These are companies where at least 51% of the
total number of shares are held by the Government.
 Opening of Accounts of Limited Companies
• The banker should obtain Certificate of Incorporation, Certificate of commencement of
business, Memorandum of Association and Articles of Association as amended up to date.
• The directors of a company have to function within the limits of the power conferred by
the Articles of Association and when they do so, these acts are binding on the company.
• A company comes into business only after the issue of the certificate of incorporation by
the Registrar of Companies. The banker should also verify the original of this certificate.
• Proof of Identity(POI) and proof of Address not only for the limited company, but also
for every authorized signatory are to be obtained.
• The banker should also obtain a certified copy of the resolution passed by the board of
Directors authorizing the opening of the account, execution of documents and conduct of
the accounts.
 Opening of Accounts of Limited Companies

• The account opening form should be filled in and signed by the authorized
signatories.
• The POI and POA besides specimen signature of the directors and the authorized
signatories should be obtained.
• A list of directors is to be obtained. The list should be signed by the chairman and
updated.
• Every limited company is expected to maintain, at its register office, the following
registers promptly updated. a) Register of Charges b) Register of Guarantees c)
Register of Resolution d) Register of Directors.
 Types of Deposits
• Savings Bank Account- As the name suggests this type of account is suitable for
people who have a definite income and are looking to save money. For example,
the people who get salaries or the people who work as labourers. This type of
account can be opened with a minimum initial deposit that varies from bank to
bank. Money can be deposited at any time in this account.
• Withdrawals can be made either by signing a withdrawal form or by issuing a
cheque or by using an ATM card. Normally banks put some restriction on the
number of withdrawal from this account. Interest is allowed on the balance of
deposit in the account. The rate of interest on savings bank account varies from
bank to bank and also changes from time to time. A minimum balance has to be
maintained in the account as prescribed by the bank.
 Types of Deposits
• Current Deposit Account - Big businessmen, companies, and institutions such
as schools, colleges, and hospitals have to make payment through their bank
accounts. Since there are restrictions on the number of withdrawals from a savings
bank account, that type of account is not suitable for them. They need to have an
account from which withdrawal can be made any number of times.
• Banks open a current account for them. Like a savings bank account, this account
also requires a certain minimum amount of deposit while opening the account. On
this deposit, the bank does not pay any interest on the balances. Rather the account
holder pays a certain amount each year as an operational charge.
• These accounts also have what we call the overdraft facility. For the convenience of
the accountholders banks also allow withdrawal of amounts in excess of the
balance of the deposit. This facility is known as an overdraft facility. It is allowed to
some specific customers and up to a certain limit subject to
previous agreement with the bank concerned.
 Types of Deposits
• Fixed Deposit Account - Some bank customers may like to put away
money for a longer time. Such deposits offer a higher interest rate. If money
is deposited in a savings bank account, banks allow a lower rate of interest.
Therefore, money is deposited in a fixed deposit account to earn interest at a
higher rate.
• This type of deposit account allows the deposit to be made of an amount for
a specified period. During this period no withdrawal is allowed. However, on
request, the depositor can encash the amount before its maturity. In that
case, banks give lower interest than what was agreed upon. The interest on a
fixed deposit account can be withdrawn at certain intervals of time. At the
end of the period, the deposit may be withdrawn or renewed for a further
period. Banks also grant a loan on the security of the fixed deposit receipt.
 Types of Deposits
• Recurring Deposit Account - While opening the account a person has to
agree to deposit a fixed amount once in a month for a certain period. The
total deposit along with the interest therein is payable on maturity. However,
the depositor can also be allowed to close the account before its maturity and
get back the money along with the interest till that period.
• The account can be opened by a person individually, or jointly with another,
or by the guardian in the name of a minor. The rate of interest allowed on
the deposits is higher than that on a savings bank deposit but lower than the
rate allowed on a fixed deposit for the same period.
 NRI Account

• An NRI Account refers to the accounts opened by an NRI or a Person of

Indian Origin (PIO) or Overseas Citizen of India (OCI), with a bank or FI
authorized by the Reserve Bank of India, to provide various banking services
to NRIs.
• NRIs may open NRI Accounts to deposit their income which may originate
either from India or from any other country. The income source may be their
employer or from an investment.
 Types of NRI Accounts
• Non- Resident Ordinary (NRO) Account - An NRO or Non-Resident Ordinary
Account may be opened with earnings arising from India. The source of income
can range from assets or investments in the form of rent, dividends, interest, etc.
• Even though deposits can be in INR or any other foreign currency, the withdrawals
can only be in Indian rupees in an NRO account.
• An NRO account can be operated jointly either with an Indian Resident or an NRI.
• Interest earned on the income in an NRO account is liable for taxation.
• Earned income from pension, rents, etc. can be sent through an NRO account.
• The main purpose of an NRO account is to house funds from the earned income
in India or abroad.
 Types of NRI Accounts
• Non-Resident External (NRE) Account - NRIs may initiate and maintain a
Non-Resident External or NRE Account from their income originating in their country of
employment/ residence. The account shall be denominated in Indian Rupees.
• An NRE account can be in the form of a Current account, Savings account, Recurring
Deposit account, or Fixed Deposit account.
• An NRE account can be operated jointly but only with another NRI.
• Deposits in an NRE account can be made of earnings from a foreign country only and not
of earnings made in India.
• Withdrawals can be made in the currency in which the NRI resides in and therefore there
is a possibility of amount fluctuation.
• Funds from one NRE account can be transferred to another NRE or NRO account easily.
• Income from the NRE account is tax-free as the principal and interest amounts are
exempted from taxation.
• Investments in India can be made with the help of the NRE (Non-Resident External)
account.
 Types of NRI Accounts
• Foreign Currency Non-Resident (Banks) Account - Foreign Currency
Non-Resident (Banks) Account or FCNR-B comprises bank deposits made by
NRIs, PIOs, and OCIs. These deposits may be denominated in any one of the
foreign currencies prescribed by the Reserve Bank of India.
• Money can be deposited in an FCNR account in any currency approved by RBI.
• FCNR accounts are considered to be term deposit accounts and not savings
accounts.
• Interest rates vary from the tenure of deposit and currency deposited in the FCNR
account.
 Types of NRI Accounts
Foreign Currency Non-Resident (Banks) Account
• The rate of interest is fixed in an FCNR account and does not fluctuate throughout
the deposit tenure.
• In case of change in residential status, an account can be held till maturity but the
interest rate may fluctuate as per bank guidelines.
• An FCNR account can be operated jointly either with a close Indian resident or an
NRI.
• FCNR Account tenure ranges from 1 year to 5 years.
• Income from the FCNR account is tax-free as the principal and interest amounts
are exempted from taxation.
• The rate of interest does not fluctuate in an FCNR (Foreign Currency
Non-Resident) account because of the deposits and withdrawals made in foreign
currencies.
 Types of NRI Accounts
• RFC accounts (Resident Foreign Currency) - are bank accounts that can
be maintained by resident Indians in foreign currency. These accounts are
especially useful for Non Resident Indians (NRI) who return to India and
would like to bring back foreign currency from their overseas bank accounts.
• Nomination facility - RFC Accounts shall have the nomination facility as in
the case of resident rupee accounts.
• Anywhere Banking - Operations are permitted from the Base Branch only
for operational convenience
• Rate of interest payable on the funds held in RFC Accounts may be decided
by the bank on the basis of market rates
• Minimum 1000 units of respective currency/for JPY 100,000/- and there is
no maximum limit
“Banking” means the accepting, for the purpose of lending or investment,
of deposits of money from the public, repayable on demand or otherwise,
and withdrawal by cheque, draft, order or otherwise;”
 Financial Institutions – Banks
• Banks are classified into commercial and cooperative. Commercial banks
operate their business for profit purposes while the basis of operation for
co-operative banks is on co-operative lines i.e. service to its members and the
society. In comparison to a commercial bank, Co-operative banks provide a
higher rate of interest.
 Financial Institutions – Scheduled and Non
Scheduled Banks
• A scheduled bank is a bank that has been included in the 2nd schedule of the RBI
Act 1934. A scheduled bank should have a minimum paid-up capital of 5 lakh.

• Non-scheduled banks are those in India that are not subject to the RBI's norms and
regulations or those that do not fall under the category of scheduled banks.
 Commercial Banks
• Commercial Banks refer to both scheduled and non-scheduled
commercial banks which are regulated under Banking Regulation Act,
1949.
- Reserve Bank of India - Directory of Bank Offices (rbi.org.in)

• “A commercial bank is a financial institution which accepts deposits

from the public and gives loans for the purposes of consumption and
investment to make profit.”
- Commercial bank - Wikipedia
 Public Sector Banks
“Public Sector Bank means a scheduled commercial bank in which the Central
Government, or one or more State Governments, jointly hold not less than
fifty-one percent of its paid up equity share capital.”
- Public Sector Bank Definition | Law Insider
 Private Sector Banks
“Private Sector Banks means banks licensed to operate in India under Banking
Regulation Act, 1949, other than Urban Co-operative Banks, Foreign Banks
and banks established under specific Statutes.”

“Private banks are banks owned by private individuals or corporations.”

 Foreign Banks
Foreign Bank means an organization that
(i) is organized under the laws of a foreign country,
(ii) engages in the business of banking,
(iii) is recognized as a bank by the bank supervisory or monetary authority of the country
of its organization or principal banking operations,
(iv) receives deposits to a substantial extent in the regular course of its business, and
(v) has the power to accept demand deposits
 Regional and Rural Banks
“The Regional Rural Banks (RRBs) were established in 1975 under the
provisions of the Ordinance promulgated on 26th September, 1975 and
Regional Rural Banks Act, 1976 with a view to developing the rural economy
by providing, for the purpose of development of agriculture, trade, commerce,
industry and other productive activities in the rural areas, credit and other
facilities, particularly to small and marginal farmers, agricultural labourers,
artisans and small entrepreneurs, and for matters connected therewith and
incidental thereto.”
- Regional Rural Banks - Rural Banking | SBI - Agri & Rural
 Small Finance Banks
• In September 2015, RBI granted licenses to 10 applicants for Small Finance
Banks which is a step in the direction of furthering financial inclusion.

• The small finance banks shall primarily undertake basic banking activities of
acceptance of deposits and lending to unserved and underserved sections
including small business units, small and marginal farmers, micro and small
industries and unorganized sector entities.
 Payment Bank

• The payments bank will be registered as a public limited company under the
Companies Act, 2013, and licensed under Section 22 of the Banking Regulation Act,
1949.

• with specific licensing conditions restricting its activities mainly to acceptance of

demand deposits and provision of payments and remittance services.
 Cont..
The primary objective of setting up of payments banks will be to further
financial inclusion by providing
(i) small savings accounts and
(ii) payments / remittance services to
(i) migrant labor workforce, low income households, small businesses, other
unorganized sector entities and other users,
(ii) by enabling high volume-low value transactions in deposits and payments /
remittance services in a secured technology-driven environment.
 Co-operative Banks

A co-operative bank is a financial entity which belongs to its members, who are at the
same time the owners and the customers of their bank. It is often established by people
belonging to the same local or professional community having a common interest.
These are small financial institutions that offer lending facilities to small businesses in
both urban and non-urban regions.
 Co-operative Banks
Co-operatives Banks are registered under the Cooperative Societies Act, 1912.
These are regulated by the Reserve Bank of India and National Bank for
Agriculture and Rural Development (NABARD) under the Banking Regulation
Act, 1949 and Banking Laws (Application to Cooperative Societies) Act, 1965.

https://www.iasgyan.in/blogs/all-about-cooperative-banks-in-india
Types of Co-operative Banks
 Urban Co-operative Banks
• Urban Cooperative Banks (UCBs) are financial institutions that operate in
urban and semi-urban areas in India.
• They help the communities, and localities, workplace groups and are set up
mostly in urban and semi-urban areas. Their main customers are mainly small
borrowers and businesses.
• Urban Co-operative Banks (UBBs) are either scheduled or non-scheduled.
Scheduled and non-scheduled UCBs are again of two kinds- multi-state and
those operating in single state.
 Rural Co-operative Banks
The rural co-operative banks (RCBs) in India are primarily responsible for
ensuring credit flow to the agriculture sector. It is made up of both short-term
and long-term cooperative credit structures.
Short term structure has three levels
• A State Co-operative Bank works at the apex level (i.e. works at the state level).
• The Central Co-operative Bank works at the Intermediate Level (i.e. works at district
level).
• Primary Co-operative Credit Societies at a base level (i.e. works at village level).
Long term structure has two levels
• State Co-operative Agriculture and Rural Development Banks (SCARDBs) at the apex
level.
• Primary Co-operative Agriculture and Rural Development Banks (PCARDBs) at the
district level or block level.
 Development Banks
• Development banks are nothing but financial institutions providing
long-term funds for capital-intensive investments for a long period of time.
Their lending yields low rates of returns, such as irrigation systems, urban
infrastructure, mining, and heavy industries, etc.
• They are also known as development finance institutions (DFI) or long-term
lending institutions.
• These banks lend at low and stable interest rates so as to promote long-term
investments along with social benefits.
• Development banks are not the same as commercial ones. Instead,
development banks mobilize short to medium-term deposits and lend for
similar periods of tenure to avoid a maturity mismatch, which affects a
bank’s solvency and liquidity.
• Unlike commercial banks, the development banks do not accept deposits
from the public. Hence, they do not entirely depend upon saving
mobilization.
• Development banks are specialized institutions that provide medium and
long-term credit lending facilities.
• Their main objective is to serve the public interest instead of earning profits.
• They provide financial assistance to both public as well as private sector
institutions.
 Various Types of Development Banks in
India
• SIDBI (Small Industries Development Bank of India)
• EXIM (Export-Import Bank of India)
• NABARD (National Bank for Agriculture & Rural Development)
• NHB (National Housing Bank)
• IFCI (Industrial Finance Corporation of India)
• IDBI (Industrial Development Bank of India)
 Non – Banking Financial Institutions
• Nonbank financial companies (NBFCs), also known as nonbank financial
institutions (NBFIs) are entities that provide certain bank-like financial
services but do not hold a banking license.
• NBFCs are not subject to the banking regulations and oversight by federal
and state authorities adhered to by traditional banks.
• Investment banks, mortgage lenders, money market funds, insurance
companies, hedge funds, private equity funds, and P2P lenders are all
examples of NBFCs.
 Mutual Funds
An Asset Management Company (AMC) or Fund House pools investments from several
individuals and institutional investors with common investment objectives.

A fund manager: finance professional, manages the pooled investment.

• Purchases securities such as stocks and bonds that are in line with the investment mandate.

• Investors would be allocated with fund units based on the amount they invest.

• Intention of the fund manager: To provide optimum returns to investors by investing in

securities.

Each investor: Profits or losses that are directly proportional to the amount they invest.
 Insurance Companies
• An insurance is a legal agreement between an insurer (insurance company)
and an insured (individual), in which an insured receives financial protection
from an insurer for the losses he may suffer under specific circumstances.
• LIC, ICICI Prudential Life Insurance Co Ltd, Bajaj Allianz Life
Insurance Co Ltd. ,SBI Life Insurance Co Ltd. etc.
 Housing Finance Companies
The term 'Housing finance' means financing for the:
Purchase of a flat or house
Acquisition of a plot and construction of a house.
Construction of a house
Extension of a house
Repairs, renovation and upgradation of a house /flat.
Housing Finance Company Registration- An Overview
National Housing Bank Bill in 1987 (to provide loans to speed up the process of housing construction)
National Housing Bank
Applicant - register with the National Housing Bank (NHB).
 Functions of Commercial Banks
• Accepting the Deposits
• Advancing the Loans
• Credit Creation
• Paying and Collecting the Credit
• Purchasing and Selling of the Securities
• Bullion Trading
• Money Remittance
• Information Banks
• Locker Facilities
• Dealings in Foreign Exchange
• Banking services for Merchant
 Reserve Bank of India
• The Reserve Bank of India was established on April 1, 1935 in accordance
with the provisions of the Reserve Bank of India Act, 1934.
• The Central Office of the Reserve Bank was initially established in Kolkata
but was permanently moved to Mumbai in 1937. The Central Office is where
the Governor sits and where policies are formulated.
• Though originally privately owned, since nationalisation in 1949, the Reserve
Bank is fully owned by the Government of India.
 Objectives of RBI

The primary goals of the RBI according to its Preamble are as follows:
• To regulate the issue of Banknotes.
• To secure monetary stability in the country.
• To meet the economic challenges by modernising the monetary policy
framework.
The primary focus of the RBI is to supervise and undertake initiatives on behalf
of the financial sector which consists of financial institutions, commercial
banks, non-banking financial companies.
 Functions of the RBI
The following are the functions of the Reserve Bank of India under various
authorities.
Supervisory and Regulatory Authority
• To set specific parameters for the banks in the country. This would include
financial operations within which the banking and financial systems are to function.
• To protect the interests of every investor and offer economic and cost-efficient
banking services to the public.
Monetary Authority
• To formulate and implement the monetary policies of the country.
• To maintain stability in the prices across all the sectors along with the objective of
growth.
 Functions of the RBI
The following are the functions of the Reserve Bank of India under various
authorities.
Currency Authority
• To issue, exchange or destroy currency that is not fit for circulation.
• To provide adequate currency notes and coins of the standard quality to the
public.
Foreign Exchange Management
• To oversee the Foreign Exchange Management Act, 1999.
• To facilitate the external trade and development of the foreign exchange
market in the country.
 Functions of the RBI

Other Functions
• To promote and perform promotional functions to support national banking
and other financial objectives.
• To offer banking solutions to the Central and State Governments.
• To act as a banker for the Central and State Governments.
• To be the Chief Banker to every bank across the country and maintain all the
banking accounts of every scheduled bank.
ORGANISATION STRUCTURE OF RBI
 Central Board
• The Reserve Bank''s affairs are governed by a central board of directors. The
board is appointed by the Government of India in keeping with the Reserve
Bank of India Act.
• Appointed/nominated for a period of four years
• Constitution:
• Official Directors
• Full-time : Governor and not more than four Deputy Governors
• Non-Official Directors
• Nominated by Government: ten Directors from various fields and two
government Officials
• Others: four Directors - one each from four local boards
 Monetary Control– Tools used by RBI
REPO & REVERSE REPO
• Repo is a transaction wherein securities are sold by the RBI and
simultaneously repurchased at a fixed price. This fixed price is determined in
context to an interest rate called the repo rate.
• The higher the repo rate, more costly are the funds for banks and hence,
higher will be the rate that banks pass on to customers. A high rate signals
that access to money is expensive for banks; lesser credit will flow into the
system and that helps bring down liquidity in the economy.
• The reverse is the reverse repo rate, which banks use to park excess money
with RBI. At present, repo rate is 6.50% and reverse repo is 3.35%.
 Monetary Control – Tools used by RBI
CASH RESERVE RATIO (CRR)
• This is the percentage of a bank’s total deposit that need to be kept as cash
with the RBI. The central bank can change the ratio to a limit. A high
percentage means banks have less to lend, which curbs liquidity; a low CRR
does the opposite. The RBI can reduce or raise CRR to tighten or ease
liquidity as the situation demands. At present, CRR is at 4.5%.
 Monetary Control – Tools used by RBI
STATUTORY LIQUIDITY RATIO
• This is the percentage of banks’ total deposits that they are needed to invest
in government approved securities. The lesser the amount of SLR, the more
banks have to lend outside. The current SLR is 18%.
 Monetary Control – Tools used by RBI
OPEN MARKET OPERATIONS
• This refers to buying and selling of government securities by RBI to regulate
short-term money supply. If RBI wants to induce liquidity or more funds
into the system, it will buy government securities and inject funds, and if it
wants to curb the amount of money, it will sell these to banks, thereby
reducing the amount of cash that banks have. RBI uses this tool actively even
outside of its monetary policy review to manage liquidity on a regular basis.
 Monetary Control – Tools used by RBI
BANK RATE
• This is the re-discounting rate that RBI extends to banks against securities
such as bills of exchange, commercial papers and any other approved
securities. In recent years, it has been the repo rather than the bank rate that
has acted as a guideline for banks to set their interest rates. Cuurently the rate
is 5.15%.
 Other Tools
MARGINAL STANDING FACILITY (MSF)
• Marginal standing facility (MSF) is a window for banks to borrow from the
Reserve Bank of India in an emergency situation when inter-bank liquidity
dries up completely. Banks borrow from the RBI in emergencies against
government securities. It serves as a safety net, ensuring liquidity in the
banking system during tight conditions.
• Banks borrow from the central bank by pledging government securities at a
rate higher than the repo rate under liquidity adjustment facility.
 Other Tools
STANDING DEPOSIT FACILITY (SDF)
• To transfer liquidity from the commercial banking sector to the Reserve
Bank of India, the standing deposit facility is a collateral-less liquidity option
for absorption mechanism implemented by the Reserve Bank of India.
• In other words it is a facility for banks to deposit excess reserves with the
RBI. It aids in liquidity management without requiring government securities
as collateral.
• The Reserve Bank of India (RBI) regulates and supervises Public Sector And
Private Sector Banks. Under the provisions of the Banking Regulation Act,
1949, it can,
• inspect the bank and its books and accounts (section 35(1) );
• examine on oath any director or other officer of the bank (section 35(3));
• cause a scrutiny to be made of the affairs of the bank (section 35(1A));
• give directions to secure the proper management of the bank (section 35A);
• call for any information of account details (section 27(2));
• determine the policy in relation to advances by the bank (section 21);
• direct special audit of the bank (section 30); and
• direct the bank to initiate insolvency resolution process in respect of a
default, under the provisions of Insolvency and Bankruptcy Code, 2016
(section 35AA).