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IFS UNIT - V

The Indian banking system has evolved significantly, serving the credit and banking needs of the economy through various types of banks, including scheduled, non-scheduled, and development banks. Key functions of banks include accepting deposits, providing loans, facilitating payments, and offering investment services, all of which contribute to economic growth and development. The document also discusses the importance of banks, the concept of non-performing assets (NPA), and their classifications.

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Divyanshi Yadav , 25
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1 views

IFS UNIT - V

The Indian banking system has evolved significantly, serving the credit and banking needs of the economy through various types of banks, including scheduled, non-scheduled, and development banks. Key functions of banks include accepting deposits, providing loans, facilitating payments, and offering investment services, all of which contribute to economic growth and development. The document also discusses the importance of banks, the concept of non-performing assets (NPA), and their classifications.

Uploaded by

Divyanshi Yadav , 25
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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UNIT – V

Indian Banking System


The banking system in India, evolved over several decades, is well established
and has been serving the credit and banking needs of the economy. The major
role of banks is to intermediate resources from the depositor to the lender for
their mutual benefit while allocating them in an efficient manner, thereby
contributing to economic growth through enhanced efficiency in usage of
resources. There are multiple layers in today's banking structure to cater to the
specific and varied requirements of different customers and borrowers. The
banking ecosystem is providing impetus to economic growth and development
of the country and catering to the specific and varied financial requirements of
different customers and borrowers.

The structure of the banking system of India can be broadly divided into
scheduled banks, non-scheduled banks and development banks. Banks that are
included in the second schedule of the Reserve Bank of India Act, 1934 are
considered to be scheduled banks

Definitions
Bank
 According to Professor Chamber "Bank is an office or institution for
keeping, lending and exchange of money."
Banking
 Any activity carried out by a bank for business purpose is called banking.
i.e. cheque, mortgage, locker, overdraft, letter of credit etc.
Note:

 Bank is a tangible object while banking is a service resources


 Bank refers to physical resources like banking staff, furniture etc. while
banking is the output (financial services) of the bank by utilizing these
resources
 Bank is a firm that collects and lends money.
 It also provides many other financial services.
Regulations

Banking Regulation Act 1949 defines primary and secondary work.

As per Sec 5(b) “Bank is a financial institution which accepts deposits from the
public for the purpose of investment and credit and repay it to the customer
on their demand in the form of cash, cheque, draft etc. RBI Act, 1934: Provide
License to all banks.

History
 First bank:
 Bank of Hindustan: 1770-1830
 British East India Company established
 Bank of Calcutta -1806
 " Bank of Bombay - 1840 "
 Bank of Madras - 1843

Note:

1. These banks were known as Presidency Bank.


2. After Revolution of 1857 British East India Company was closed And
these banks were merged in 1921 and renamed as Imperial Bank of
India
3. In 19S5 Imperial Bank was renamed as SBI and the RBI functions
similar to imperial blank
4. Allahabad bank established in 1965. it also one of the oldest joint
stock bank
5. Oldest joint stock bank was Bank of Upper India (1863-1913)
6. PNB is the first bank purely managed by Indian (1895, Lahore)
7. Central Bank of India also known as Swedish Bank was first bank
which was wholly owned and managed by Indian (1911).
8. RBI Act was passed in 1934 and RBI came into existence in 1935.
9. Bank of India became the first bank to open branch outside India
(London) in 1946
10.RBI was nationalized in 1948
11.Banking Regulation Act was passed in 1949 to give power to RBI "
Imperial Bank of India was nationalized in 1955 via State Bank of
India Act "
12. 1969: 14 Banks nationalized having paid up share capital of Rs 50
Crore "RRBs were formed in 1975.
13.1980: 6 banks nationalized having paid up share capital of Rs 200
Crore
14. 1 bank merge in PNB in 1993
15.9 banks were merged in 2019
16.At present there are 12 public sector banks in which 11 are
nationalized banks.

Features of Bank
1. Deals with Money: A bank’s main characteristic is that it handles all
financial transactions. You can put your money in a bank account, for
example, to store it safely, and you will be interested in the money you
save in the account.
2. Provides Loans: Banks gain additional money by providing loans for a
variety of products. The bank earns the additional funds by lending money
to the qualifying person at predetermined rates.
Banks now provide loans for a variety of purposes, including study loans,
vehicle loans, housing loans, personal loans, and so on.
3. Withdrawal and payment facilities: Customers can use a bank’s
numerous payment and withdrawal services to receive their money
quickly and easily. Customers can use cheques and draughts to withdraw
money, as well as ATMs established by banks at various sites throughout
the city.
4. Internet services: Modern banks now provide internet services, which is
another element of a bank. The growth of the internet and its integration
into the banking industry has made it even easier for customers to do
numerous transactions. Through their apps, banks are providing online
services. You can pay your bills, buy groceries, and shop without having
cash on you.
5. Business: Banking’s sole purpose is not to supply consumers with banking
services. To make additional money, all banks are involved in subsidiary
enterprises. Their only responsibility is to deliver optimum customer
satisfaction and maximum interest rates in order to attract more clients to
bank with them. To make a profit, money is moved from one hand to the
next.

Functions of Banks
Some of the major functions of banks are mentioned below:

1. Accepting Deposits: Banks provide a safe place for individuals and


businesses to deposit their money, which can be withdrawn when
needed.
2. Providing Loans: Banks lend money to individuals and businesses for
various purposes, such as home mortgages, business expansion, or
personal loans.
3. Payments and Settlements: Banks enable transactions through various
payment methods, like checks, debit/credit cards, and electronic
transfers.
4. Currency Exchange: Many banks offer foreign exchange services,
allowing customers to buy, sell, or exchange foreign currencies.
5. Safekeeping of Valuables: Some banks offer safe deposit boxes for
customers to securely store valuable items and documents.
6. Investment Services: Banks also provide investment products like
mutual funds, stocks, and bonds, helping customers grow their wealth.
7. Internet Banking Services: Banks offer online and mobile banking
services, making it convenient for customers to access their accounts,
pay bills, and transfer funds.
8. General Services: Bank Draft, ATM, Letter of Credit, Bank Guarantee,
Locker Facilities, Travellers Cheque, Internet Banking, Credit Creation
and, Electronic Clearing Services (ECS).
9. Agency Functions: Payment of Bills , Payment of premium , Collection of
dividend and interest ,Collection of bill of exchange and promissory
notes.
Importance of Bank
 Encourage Ismael Savings
 Capital formation
 Supply of adequate money
 Credit creation
 Help to trade and industry
 Help to foreign trade
 Help to agriculture
 Safe custody of money and valuable
 Employment
 Services to govt.
 Improvement in standard of living
 Importance in advancing loan
 Economic development
 Transfer of money

NPA [Non-performing assets]


NPA expands to non-performing assets (NPA). Reserve Bank of India
defines Non Performing Assets in India as any advance or loan that is overdue
for more than 90 days.
“An asset becomes non-performing when it ceases to generate income for the
bank,” said RBI in a circular form 2007.
To be more attuned to international practices, RBI implemented the 90 days
overdue norm for identifying NPAs has been made applicable from the year
ended March 31, 2004. Depending on how long the assets have been an NPA,
there are different types of non-performing assets as well.

Categories of NPA
1. Standard Assets:
 Standard Asset is one which does not disclose any problems, and which
does not carry more than normal risk attached to the business. Such an
asset should not be an NPA.
2. Sub-standard Assets:
 A substandard asset would be one, which has remained NPA for a period
less than or equal to 12 months.
 Such an asset will have well defined credit weaknesses that jeopardise
the liquidation of the debt and are characterized by the distinct
possibility that the banks will sustain some loss, if deficiencies are not
corrected.
3. Doubtful Assets:
 An asset is classified as a doubtful asset if it remains as an NPA for more
than 12 months.
 A loan classified as doubtful has all the weaknesses inherent in assets
that were classified as sub-standard, with the added characteristic that
the weaknesses make collection or liquidation in full, - on the basis of
currently known facts, conditions and values highly questionable and
improbable.
4. Loss Assets:
 This loan is identified either by the bank itself or an external auditor or
internal auditor as that loan where amount collection is impossible, and
the bank has to dent its balance sheet. The bank, in this case, has to
write off the entire loan amount outstanding or need to make a
provision for the total amount which needs to be written off in the
future.

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