Unit 1

Q1. Different types of Banks and their functions?

Introduction

Banks are financial institutions that perform deposit and lending functions. There are various types of
banks in India and each is responsible for performing different functions. The bank takes deposits at a
much lower rate from the public called the deposit rate and lends money at a much higher rate called
the lending rate.

Classification of Banks

Banks can be classified into various types. Given below are the bank types in India:-

1. Central Bank or Reserve Bank of India(RBI)

Reserve Bank of India, abbreviated as RBI, is the central bank of the Republic of India, and regulatory
body responsible for regulation of the Indian banking system and Indian currency. Owned by the
Ministry of Finance, Government of the Republic of India, it is responsible for the control, issue, and
maintenance of the supply of the Indian rupee.

Functions of RBI

 Issuing Currency: The RBI is responsible for issuing and managing the national currency,
ensuring its stability and availability.
 Banker and Advisor to the Government: The RBI acts as the government's banker, managing its
accounts, accepting deposits, and making payments on its behalf
 Custodian of Foreign Exchange Reserves: The RBI holds and manages the country's foreign
exchange reserves.
 Banker to Banks: The RBI provides banking services to commercial banks, acting as a clearing
house for inter-bank payments and providing liquidity when needed.
 Lender of Last Resort: In times of crisis, the RBI can provide financial assistance to commercial
banks that are unable to borrow elsewhere.
 Regulating Credit: The RBI regulates credit availability in the economy to maintain economic
stability and prevent excessive borrowing or inflation.
 Managing Monetary Policy: The RBI sets monetary policy, which involves controlling interest
rates and managing the money supply to achieve macroeconomic goals.
 Supervising Financial Institutions: The RBI oversees and regulates the banking and financial
sector, ensuring the stability and integrity of the system.

2. Cooperative Banks: These banks are organised under the state government’s act. They give
short-term loans to the agriculture sector and other allied activities.The main goal of
Cooperative Banks is to promote social welfare by providing concessional loans
 Financial Inclusion: Cooperative banks play a crucial role in reaching out to underserved
populations, particularly in rural areas.
 Credit Facilities: They provide loans and other credit facilities to members, including agricultural
loans, loans for small businesses, and personal loans.
 Rural Development: Cooperative banks are often deeply involved in promoting rural development
by providing financing for agricultural activities, small-scale industries, and other rural development
projects.
 Affordable Credit: Cooperative banks often offer loans at competitive interest rates, making credit
more accessible to members, especially those with limited means.
 Supporting Small Businesses: They provide financial support to micro and small enterprises,
contributing to job creation and economic growth in rural and urban areas.
 Financial Literacy: Some cooperative banks act as financial literacy educators, empowering
communities to make informed financial decisions.

3. Commercial Banks

These are the most common types of banks and include public sector banks, private sector banks, and
foreign banks. They provide various services like savings and current accounts, loans, and investments.
They have a unified structure and are owned by the government, state, or any private entity.

The commercial banks can be further divided into the following

Public sector Banks – A bank where the majority stakes are owned by the Government or the central
bank of the country.

Private sector Banks – A bank where the majority stakes are owned by a private organization or an
individual or a group of people

Foreign Banks – The banks with their headquarters in foreign countries and branches in our country, fall
under this type of bank

Regional Rural Banks (RRB) – These are special types of commercial Banks that provide concessional
credit to agriculture and rural sectors. RRBs were established in 1975 and are registered under the
Regional Rural Bank Act, 1976. RRBs are joint ventures between the Central government (50%), State
government (15%), and a Commercial Bank (35%).

Functions of commercial Banks

Primary Functions:

 Accepting Deposits: Commercial banks accept various types of deposits, including savings,
current, and fixed deposits.
 Granting Loans and Advances: They provide loans and advances in various forms like cash
credit, overdraft, and bill discounting.
  Facilitating Payments: They help in the transfer of funds and enabling payments through
checks, electronic transfers, and other methods.
 Credit Creation: Commercial banks play a crucial role in creating credit, which is essential for
economic growth.

Secondary Functions:

 Acting as Agent: Banks can act as agents for their customers, handling tasks like collecting
payments, managing investments, and paying bills.
 Providing Safe Custody: They offer safekeeping services for valuables like jewelry and important
documents.
 Offering Financial Services: They provide a range of other financial services, including issuing
letters of credit, offering consumer financing, and providing investment advice.
 Providing Financial Assistance: They can provide financial assistance to educational institutions
through educational loans.

4. Local Area Banks (LAB): They were introduced in India in the year 1996. These are organized by
the private sector. Earning profit is the main objective of Local Area Banks. Local Area Banks are
registered under Companies Act, 1956

5. Specialized Banks: Certain banks are introduced for specific purposes only. Such banks are
called specialized banks. These include:
 Small Industries Development Bank of India (SIDBI) – Loans for a small-scale industry or business
can be taken from SIDBI.
 EXIM Bank – EXIM Bank stands for Export and Import Bank. To get loans or other financial
assistance with exporting or importing goods by foreign countries can be done through this
type of bank
 National Bank for Agricultural & Rural Development (NABARD) – To get any kind of financial
assistance for rural, handicraft, village, and agricultural development, people can turn to
NABARD.

6. Small Finance Banks: As the name suggests, this type of bank looks after the micro industries,
small farmers, and the unorganized sector of society by providing them with loans and financial
assistance. These banks are governed by the central bank of the country.

7. Payments Banks: People with an account in the payments bank can only deposit an amount of
up to Rs.1,00,000/- and cannot apply for loans or credit cards under this account.

Conclusion: Banks serve as crucial financial intermediaries, facilitating the flow of money between
savers and borrowers and hence plays an important role in expanding the economy of the country.
 Q2. What are the functions of Commercial Banks in India?

Introduction

Banks are financial institutions that perform deposit and lending functions. There are various types of
banks in India and each is responsible for performing different functions. The bank takes deposits at a
much lower rate from the public called the deposit rate and lends money at a much higher rate called
the lending rate.

What is Commercial Bank?

A commercial bank is a kind of financial institution that carries all the operations related to deposit and
withdrawal of money for the general public, providing loans for investment, and other such activities.
These banks are profit-making institutions and do business only to make a profit.

The two primary characteristics of a commercial bank are lending and borrowing. The bank receives the
deposits and gives money to various projects to earn interest (profit). The rate of interest that a bank
offers to the depositors is known as the borrowing rate, while the rate at which a bank lends money is
known as the lending rate.

Types of Commercial Banks:

The commercial banks can be further divided into the following

Public sector Banks – A bank where the majority stakes are owned by the Government or the central
bank of the country.

Private sector Banks – A bank where the majority stakes are owned by a private organization or an
individual or a group of people

Foreign Banks – The banks with their headquarters in foreign countries and branches in our country, fall
under this type of bank

Regional Rural Banks (RRB) – These are special types of commercial Banks that provide concessional
credit to agriculture and rural sectors. RRBs were established in 1975 and are registered under the
Regional Rural Bank Act, 1976. RRBs are joint ventures between the Central government (50%), State
government (15%), and a Commercial Bank (35%).

Functions of Commercial Banks

The functions of commercial bank can be broadly classified into

1. Primary Functions
2. Secondary Functions
Primary Functions

The primary functions of commercial banks are accepting deposits and providing loans. They also
facilitate payment systems, offer financial advice, and play a role in creating credit. The details are as
follows:

1. Accepting Deposits: Customers can put money into commercial banks through savings, fixed,
and current deposits.

 Savings Deposits: A customer can add money to their account up to a certain limit with a
savings deposit. People with a fixed income like these deposits because they help them save
money over time.

 Fixed Deposits: With a fixed deposit, the money is locked in for a certain amount of time. Fixed
deposits are also called “time deposits” because the money is put away for a certain amount of
time.

 Current Deposits: With current deposits, account holders can put money in and take it out of
their accounts whenever they need to. People and businesses can sometimes get overdrafts up
to a certain limit with their current accounts.

2. Loans: One of the main things commercial banks do is lend money to businesses and people,
and they make money off the interest they earn. Usually, banks keep a small reserve to cover
their costs and give the rest of the money to customers in the form of short-term and long-term
loans.

3. Credit Creation – Credit creation is something that only commercial banks can do. Instead of
giving out cash, banks create a line of credit and give the loan to a business or commercial body
all at once.Commercial banks offer both loans with and without collateral.

 Cash Credit: One of the things that commercial banks do is lend money to people and
businesses against bonds, inventory, and other types of securities. This type of credit, which is
often called “cash credit,” gives you a bigger amount than other types of credit.

 Short-Term Credits: Short-term loans are usually given without collateral, and the loan amount
and length of time to pay it back are smaller. Personal loans is another name for these kinds of
loans.

Secondary Functions

Secondary functions of commercial banks include acting as an agent for customers, providing financial
advice and services, and facilitating financial transactions beyond the core of accepting deposits and
making loans.
  Acting as an agent for customers: Banks collect bills, drafts, and dividends, and make payments
like rent, insurance premiums, and loan installments.

 Collecting and clearing cheques: Banks handle the collection and clearing of cheques on behalf
of their customers.

 Acting as trustee, executor, or administrator: Banks can act as trustees, executors of wills, or
administrators of estates.

 Purchasing and selling securities: Banks facilitate the buying and selling of stocks and bonds for
customers.

 Providing locker facilities: Banks offer safe deposit boxes for storing valuables and important
documents.

 Dealing in foreign exchange: Banks facilitate foreign exchange transactions for customers.

 Transferring funds: Banks facilitate the transfer of funds between different accounts and
locations.

 Issuing letters of credit and guarantees: Banks issue letters of credit and guarantees to facilitate
trade and other transactions.

 Providing investment advice and portfolio management: Banks offer financial advice and
manage investment portfolios for customers.

 Offering insurance and mutual fund products: Banks provide a range of insurance and mutual
fund products for investment purposes.

 Providing consumer finance: Banks offer loans for purchasing consumer goods and services.

 Issuing travellers cheques and circular notes: Banks issue travellers cheques and circular notes
for convenient travel and international transactions.

 Providing credit worthiness reports: Banks provide reports on the credit worthiness of their
customers.

Conclusion: Commercial banks are very important to the economy of the country as a whole. They are
so important to modern life that they are almost a necessity. They are at the centre of the money
market.
 Q3. What are the achievements and objectives of Nationalization of Banks?

Introduction

Banks are financial institutions that perform deposit and lending functions. There are various types of
banks in India and each is responsible for performing different functions. The bank takes deposits at a
much lower rate from the public called the deposit rate and lends money at a much higher rate called
the lending rate.

Nationalization of Banks

Nationalization of banks refers to the process where the government takes control of private
commercial banks and converts them into public sector entities. This is mainly done to primarily help
answer the twin purposes of more equal distribution of financial resources and promotion of financial
inclusion throughout the country.

By nationalization, the government wants to divert the country's financial resources to sectors like
agriculture, small-scale industries, and several developmental projects. This shall ensure integrated
economic growth.

Nationalization was started in India in 1969 by then Prime Minister Indira Gandhi. It worked like a
revolution in the scenario of banking.

In the first phase 14 banks with deposits more than 50 crores were nationalized in July 1969. In the
second phase 6 banks with deposits more than 200 crores were nationalized in April 1980.

Objectives of Nationalization of Banks

The primary objectives of nationalizing banks are to increase public access to financial services, direct
credit to priority sectors, and control private monopolies over banking. Specifically, nationalization
aimed to expand banking services to rural and semi-urban areas, reduce regional imbalances, and
promote financial inclusion.

 Expanding Banking Access: Nationalization aimed to make banking services more accessible to
the masses, particularly in rural and underserved areas, by expanding the branch network of
public sector banks.

 Directing Credit to Priority Sectors: The government sought to channel credit towards
agriculture, small industries, and other priority sectors that were previously underserved by
private banks.

 Controlling Private Monopolies: Nationalization aimed to curb the control of a few private
business houses over banking, ensuring that credit was distributed more equitably.
  Promoting Financial Inclusion: By expanding access to banking services and providing credit to
the weaker sections of society, nationalization aimed to promote financial inclusion and reduce
regional imbalances.

 Mobilizing Savings: Nationalization was also aimed at mobilizing public savings by encouraging
people to deposit their money in banks.

 Strengthening Banking Regulation and Supervision: The government aimed to strengthen the
regulatory framework for banks and enhance their supervision to ensure their stability and
efficiency.

Achievements of Nationalization of Banks

The nationalization of commercial banks has yielded much to the development of Indian economy. The
major achievements of nationalization are as follows:

1. Expansion of branches

There had been considerable spurt in the number of branches of commercial banks in the country. The
banking habits of people had also improved. After nationalization, commercial banks have been
successful in establishing branches even in remote and backward areas of the country.

2. Growth of deposits

Banking habits of the people in India witnessed tremendous improvement with the expansion of bank
branches by commercial banks. Improved banking habits of the people led to generation of more
deposits by commercial banks.

3. Distribution of credit

The availability of bank credit in the country is fully revamped after nationalization. Credit is made
available in every nook and corner of the country.

4. Diversification of activities

After nationalization banks have diversified their activities by introducing a number of new programmes
and innovative schemes. They are engaged in financial services like merchant banking, lease financing a
mutual funds, venture capital etc...

5. Developmental role of banks

After nationalization commercial banks started playing an inevitable role for the economic development
of the country. They have implemented lead bank scheme, Village Adoption Scheme, Service Area
Approach etc.

6. Importance to priority sectors

Priority sectors which was earlier neglected by commercial banks have been given due attention. This
has improved the standard of living of the people in the rural areas.

7. Funds for plans

After nationalization commercial banks started investing their funds in government and other approved
securities to meet their liquidity requirements. Through this, banks made their funds available to
government for meeting the plan requirements.

8. Credit to weaker sections

After nationalization banks started extending credit facilities to the weaker sections of the society by
implementing special schemes. The weaker sections comprising of marginal farmers, landless labourers,
artisans, village and cottage industries, scheduled caste and scheduled tribes etc. improved their
economic conditions with the financial support of the banks.

9. Export credit

Commercial banks started providing credit to exporters at Concessional rates and terms. Commercial
banks encourage export as it improves the balance of trade of the country.

Criticisms of Nationalization of Banks

 Inadequate Banking Facilities: Even though banks’ reach has increased across the country,
many parts of the country are still remained unbanked. This was due to low levels of efficiency
due to a lack of competition.
 Lowered Efficiency and Profits: After nationalization of banks, they were brought under the
control of government which meant political pressures thereby hampering professionalism. It
resulted into lower efficiency and poor profitability of banks.
 Political and Administrative Interference: Many public sector banks badly suffered due to the
political interference and populist policies. It was seen in arranging loan meals which resulted in
huge non-performing assets. Even now a huge portion of NPA lies in account of Public Sector
Banks.
 Increased Expenditure: Huge expansion in a branch network, large staff administrative
expenditure, trade union struggle, etc., lead to increased banks expenditure.
 Complex Interest Rate Structure: Different rate of interest with different loans tenure resulting
in higher Non-Performing Assets (NPAs).

Conclusion

The nationalization of banks in India was a landmark event that re-shaped India’s banking system. It
marked a significant step towards achieving greater financial inclusion and directing credit towards
priority sectors. However, it has also led to some issues and challenges for the Banking System in India.
Necessary banking reforms should be carried out in order to mitigate its ill effects and make the Indian
banks more efficient.
 Q4. Write a note on ancillary services of Banks?

Introduction

Banks are financial institutions that perform deposit and lending functions. There are various types of
banks in India and each is responsible for performing different functions. The bank takes deposits at a
much lower rate from the public called the deposit rate and lends money at a much higher rate called
the lending rate.

Classification of Bank Services

The Bank services can be broadly classified into

1. Primary Services: Borrowing and lending of money.

2. Ancillary or Secondary Services: Services offered by banks to help the customers Such activities
include collection of cheques, dividend, warrants, etc. on behalf of customers as well as
effecting transfer of funds, remittances by mail and telegram in order to attract customers and
make banking services effective.

Ancillary Services can be classified into

1. Services rendered to banks own customers: Some of functions in this category are enumerated
below:

(a) Dealing in Bills of Exchange, Promissory Notes, Hundies and Drafts.

(b) Issuing letter of credit, Traveller’s cheques and Circular notes.
(c) Buying, selling and dealing in bullion as well as foreign exchange and foreign bank notes.
(d) Acting as ‘agent’ for clients, buying and selling shares and debentures, and acting as
underwriter.
(e) Collection and remittance of money and extending guarantee against loans raised by
customers.

2. Services available to general public: Some of functions in this category are enumerated below:

(i) Providing facility of lockers for the safe custody of valuables.

(ii) Financial assistance for the establishment of trusts, association, clubs and charitable
institutions.
(iii) Performing certain functions as are incidental or conducive to the promotion and
advancement of trade and commerce.
(iv) extending financial help to the weaker sections of society for self-employment.
(v) Issue of bank drafts, gift-cheques, banker's cheques, etc.
 (vi) Providing financial assistance to the physically handicaped to engage in gainful occupation
and earn their livelihood.

Types of Ancillary services

The different types of Ancillary services are as follows

1. Remittance Services: Remittance services, offered by banks and other financial institutions,
facilitate the transfer of money from one party to another, often across geographic boundaries.
These services can be used for various purposes, including supporting family abroad,
educational expenses, business transactions, and more. Banks offer different methods for
remittance, including wire transfers, digital payments, and physical cash transfers.

2. Safe custody of valuables: Banks offer safe deposit lockers, a secured storage solution for
valuables and important documents. These lockers provide a centralized and organized way to
protect items like jewelry, heirlooms, valuable documents, and precious metals. The banks, in
turn, provide the locker, which is usually located in a vault or reinforced room with secured
locks.

3. Merchant Banking services: Merchant banking refers to the financial services merchant banks
provide to large corporations and high-net-worth individuals. These services include:

 Fundraising: Assisting businesses in raising capital.

 Advisory Services: Offering guidance on mergers, acquisitions, and financial strategy.
 Loan Syndication: Coordinating credit arrangements from multiple institutions.
Portfolio and Wealth Management: Managing investments and assets.

Merchant banks specialise in complex financial transactions and international trade, providing
critical support to multinational businesses and boosting economic growth.

4. Bid Bonds and Performance Guarantee: A project owner receives a bid bond from a contractor
as a part of the supply bidding process. A bid bond provides a guarantee that a winning bidder
will take up the contract as per the terms at which they bid. A bid bond ensures compensation
to the bond owner if the bidder fails to begin a project. Bid bonds are often used in construction
jobs or other projects that follow a similar bid-based selection process.

5. Standing instruction: A standing instruction is a payment order that instructs a bank to make
regular payments on a specific date or frequency. It's a way to automate recurring payments like
bills, subscriptions, or transfers.

Examples of uses:
 Paying monthly rent, mortgage payments, or utility bills.
  Transferring funds to another account for savings or other purposes.
 Making payments for subscriptions or services.
 Repaying loan installments (EMIs).

6. Credit/Debit card services: Credit and debit card services offer a range of convenient and
secure ways to manage finances, make payments, and access funds. They can be used for online
purchases, in-store payments, ATM withdrawals, and bill payments. Debit card allows a
customer to utilize the funds available in his account while Credit cards offer a line of credit that
you can use to make purchases and pay off later.

7. Gift Cheques: A gift cheque, also known as a gift card or voucher, is a way to give a gift of
money, allowing the recipient to choose their own purchase from a specific retailer or online
platform. Gift cheques can be purchased from banks or online retailers, and they can be used at
participating stores or e-commerce sites.

8. Teller System: A teller system in banking refers to the hardware and software used by bank
tellers to process transactions, communicate with the core banking system, and manage cash.
These systems are typically networked to a core banking system, allowing tellers to perform a
wide range of tasks, from cash withdrawals and deposits to fund transfers and bill payments.

9. Stock Invest: Reserve Bank of India has permitted 56 banks to issue Stock Invest

Rule in stock invest:

 Name of the capital issuing company has to be filled before delivering to the applicant
 Restricted to individual investors and mutual funds
 Issued against term deposits and credit balances in saving and current accounts
 Effective ceiling of Rs.50000 per individual per capital (not applicable for mutual funds)
 Original stock invest should be enclosed Bank’s lien on deposits account in respect of
unused stock invest shall not be lifted before 4 months

Conclusion:

All the above ancillary services are providing competitive advantage to the banks in terms of customer
satisfaction and also customer loyalty

But all these implementation requires a lot of patience and conscious efforts.
 Q5. Explain the main features of Banking Regulation Act, 1949?

Introduction

Banking regulation refers to the rules and guidelines set by government agencies and central banks to
oversee the activities of banks and other financial institutions. These regulations aim to protect
consumers, ensure the stability of the financial system, and prevent financial crime.

Banking Regulation Act, 1949

The Banking Regulation Act, 1949, is a key piece of legislation in India that regulates banking companies
and empowers the Reserve Bank of India (RBI) to supervise and control them. It came into force on
March 16, 1949, and was initially known as the Banking Companies Act, 1949. The act aims to safeguard
depositors' interests, ensure sound banking practices, and control the activities of banking companies.

Salient features of BRA, 1949

1. A comprehensive definition of banking so as to bring within the scope of the legislation all
institutions which receive deposits, repayable on demand or otherwise for lending or
investment.

2. Empowering the RBI to license banking companies.

The Act mandates that all banking companies obtain a license from the Reserve Bank of India
(RBI) to operate. Key aspects include:

 Inspection before Licensing: RBI inspects books and records to ensure compliance with legal
and operational standards.
 License Revocation: The RBI can revoke licenses if a bank fails to comply with the Act or ceases
to operate as a banking company.

3. Prohibition of non-banking companies from accepting deposits repayable on demand.

4. Prohibition of trading to eliminate non-banking risks.

Section 8 prohibits banks from engaging in trading activities unrelated to their core functions.
Key restrictions include:

 Banks cannot directly or indirectly trade or barter goods.

 Exceptions are made for selling goods acquired through security enforcement or managing bills
of exchange received for collection or negotiation.

This restriction prevents banks from deviating from their core objective of financial
intermediation, reducing risk exposure.
5. Prescription of minimum capital standards.

Section 11 specifies the minimum paid-up capital and reserve requirements for banking
companies based on their incorporation and location.
 Banks Incorporated Outside India: Paid-up capital must exceed ₹15 lakhs. If operating
in cities like Bombay or Calcutta, the requirement increases to ₹20 lakhs.
 Banks Incorporated in India: Minimum capital varies:
5 lakhs for banks operating across states.
10 lakhs if operating in Bombay, Calcutta, or both.
1 lakh for banks operating within a single state, plus:
10,000 per branch in the same district as the head office.
25,000 per branch in other districts.
 Capital Standards: Subscribed capital must be at least half of the authorised capital.
Paid-up capital must be at least half of the subscribed capital.
 Reserve Fund: Banks must allocate 20% of their annual profits to a Reserve Fund. Any
appropriation from this fund must be reported to the RBI within 21 days.

These measures ensure banks maintain adequate financial reserves, promoting stability and
depositor confidence.

6. Limiting the payments of dividends.

 Banks can distribute dividends only after fulfilling specific obligations:
 All capital expenditures must be paid off.
 Depreciation on investments (such as approved securities, shares, debentures, or bonds) must
be accounted for and written off.

This provision ensures that dividends are paid out only when the bank is financially stable.

7. Inspection of books and accounts of a bank by Reserve Bank.

Prescription of a special form of balance sheet and conferring of powers on the Reserve Bank to
call for periodical returns.Banks are required to prepare:

A balance sheet.
A profit and loss account.

These financial documents must be finalised on the last working day of the financial year and
comply with accounting standards prescribed by the RBI.This ensures transparency and accuracy
in financial reporting.

The RBI also has the authority to inspect a bank’s:

Books of accounts.
 Records.
Business operations.

Post-inspection: The RBI submits a report to the bank with necessary observations and
recommendations. Bank directors must cooperate fully by providing all relevant documents
during inspections. This oversight mechanism ensures adherence to statutory obligations and
sound banking practices.

8. Empowering the central government to take action against banks conducting their affairs in a
manner detrimental to the interests of the depositors.

9. Inclusion in the scope of legislation of Banks incorporated or registered outside the provinces of
India.

10. Provision for bringing the Reserve Bank of India into closer touch with banking companies.

11. Provision of an expeditious procedure for liquidation.

12. Bringing the imperial bank of India i.e. SBI within the purview of some of the provisions of the
Bill.

13. Widening the powers of the Reserve Bank of India so as to enable it to come to the aid of
banking companies in times of emergencies.
14. Provision for the extension of the Act to the whole of India.

Offences and Punishments under the Banking Regulation Act, 1949

The Banking Regulation Act, 1949, enforces strict penalties to maintain compliance and accountability
within the banking sector. The key provisions under Section 46 include:

 Intentional Misrepresentation: A person can face imprisonment up to three years and a fine
of up to ₹1 crore for knowingly misrepresenting facts or providing false information.
 Failure to Comply with Inspections: Non-compliance with inspection requirements can result
in a fine of up to ₹20 lakh and an additional ₹50,000 for each day the violation continues.
 Illegal Acceptance of Deposits: Directors of banking companies accepting deposits in
violation of the Act are fined twice the amount of the deposits.
 Negligence Leading to Default: Directors or secretaries are held accountable for defaults
caused due to negligence, ensuring responsibility for their actions.

Conclusion: The Banking Regulation Act, 1949, remains a cornerstone of India’s banking system,
addressing the dynamic challenges of the financial sector. While its amendments, especially in 1965 and
2020, have strengthened the framework, addressing shortcomings like NPAs and public sector bank
oversight is essential for its continued effectiveness.
 Q6. Write a note on Evolution/Development of Banking in India?

Introduction

Banking in India forms the base for the economic development of the country. Major changes in the
banking system and management have been seen over the years with the advancement in technology,
considering the needs of people.

The History of Banking in India dates back to before India got independence in 1947.

Phases of development

The banking sector development can be divided into three phases:

Phase I: The Early Phase which lasted from 1770 to 1969

Phase II: The Nationalization Phase which lasted from 1969 to 1991

Phase III: The Liberalization or the Banking Sector Reforms Phase which began in 1991 and continues to
flourish till date

Pre Independence Period (1786-1947)

The first bank of India was the “Bank of Hindustan”, established in 1770 and located in the then Indian
capital, Calcutta. However, this bank failed to work and ceased operations in 1832.

During the Pre Independence period over 600 banks had been registered in the country, but only a few
managed to survive.

Following the path of Bank of Hindustan, various other banks were established in India. They were:

 The General Bank of India (1786-1791)

 Oudh Commercial Bank (1881-1958)
 Bank of Bengal (1809)
 Bank of Bombay (1840)
 Bank of Madras (1843)

During the British rule in India, the East India Company had established three banks: Bank of Bengal,
Bank of Bombay and Bank of Madras and called them the Presidential Banks. These three banks were
later merged into one single bank in 1921, which was called the “Imperial Bank of India.”

The Imperial Bank of India was later nationalized in 1955 and was named The State Bank of India, which
is currently the largest Public sector Bank.

The reasons as to why many major banks failed to survive during the pre-independence period, the
following conclusions can be drawn:
  Indian account holders had become fraud-prone
 Lack of machines and technology
 Human errors & time-consuming
 Fewer facilities
 Lack of proper management skills

Post-Independence Period (1947-1991)

At the time when India got independence, all the major banks of the country were led privately which
was a cause of concern as the people belonging to rural areas were still dependent on money lenders
for financial assistance.

With an aim to solve this problem, the then Government decided to nationalize the Banks. These banks
were nationalized under the Banking Regulation Act, 1949. Whereas, the Reserve Bank of India was
nationalized in 1949.

Following it was the formation of State Bank of India in 1955 and the other 14 banks were nationalized
between the time duration of 1969 to 1991. These were the banks whose national deposits were more
than 50 crores.

Given below is the list of these 14 Banks nationalized in 1969:

 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 the year 1980, another 6 banks were nationalized, taking the number to 20 banks.

Impact of Nationalization

There were various reasons why the Government chose to nationalize the banks. Given below is the
impact of Nationalizing Banks in India:
  This lead to an increase in funds and thereby increasing the economic condition of the country
 Increased efficiency
 Helped in boosting the rural and agricultural sector of the country
 It opened up a major employment opportunity for the people
 The Government used profit gained by Banks for the betterment of the people
 The competition decreased, which resulted in increased work efficiency

Liberalization Period (1991-Till Date)

Once the banks were established in the country, regular monitoring and regulations need to be followed
to continue the profits provided by the banking sector. The last phase or the ongoing phase of the
banking sector development plays a hugely significant role.

To provide stability and profitability to the Nationalized Public sector Banks, the Government decided to
set up a committee under the leadership of Shri. M Narasimham to manage the various reforms in the
Indian banking industry.

The biggest development was the introduction of Private sector banks in India.

The other measures taken include:

 Setting up of branches of the various Foreign Banks in India

 No more nationalization of Banks could be done
 The committee announced that RBI and Government would treat both public and private sector
banks equally
 Any Foreign Bank could start joint ventures with Indian Banks
 Payments banks were introduced with the development in the field of banking and technology
 Small Finance Banks were allowed to set their branches across India
 A major part of Indian banking moved online with internet banking and apps available for fund
transfer

Conclusion

Thus, the history of banking in India shows that with time and the needs of people, major developments
have been brought about in the banking sector with an aim to prosper it.

The entire period of evolution of the banking industry is ongoing, and each day new changes can be
seen in the banking sector for the betterment of the economic growth of the country.
 Q7. Write a note on Regional Rural Banks (RRB)?

Introduction

Banks are financial institutions that perform deposit and lending functions. There are various types of
banks in India and each is responsible for performing different functions. The bank takes deposits at a
much lower rate from the public called the deposit rate and lends money at a much higher rate called
the lending rate.

Regional Rural Banks (RRB)

Regional Rural Banks were established in 1975 and are registered under the Regional Rural Bank Act,
1976.

Regional Rural Banks (RRBs) in India are the scheduled commercial banks that conduct banking activities
for the rural areas at the state level. As the name suggests, the Regional Rural Banks cater to the needs
of the rural and underprivileged people at the regional level across different states in the country.

Ownership of RRB

The equity of the Regional Rural Banks is held by the stakeholders in a fixed proportion. This proportion
is 50:35:15, distributed as:

 Central Government – 50%

 Sponsor Bank – 35%
 State Government – 15%

Features of RRB

Following are the characteristic features of the Regional Rural Banks in India:

 The RRBs possess complete knowledge of the problems faced by the people in the rural regions
as they operate in a familiar environment.
 They show professionalism in mobilizing the finances just like that of a commercial bank.
 RRBs provide banking as well as credit facilities to the marginal farmers, small entrepreneurs,
artisans, laborers, etc. in rural areas.
 They fulfill the priority sector lending norms as applicable on the commercial banks.
 They are required to work within their prescribed local limits only

Objectives of RRB

The Regional Rural Banks in India are entrusted with the following functions and/ or objectives as
described below:

 Opening branches of banks in the rural areas

  Providing loans for the development of the agricultural sector to small farmers, agricultural
laborers, small entrepreneurs, etc.
 Generating employment opportunities
 Encouraging savings among the rural people, accepting deposits, and using the funds for
productive purposes
 Protecting common people from money lenders’ exploitation
 Reducing the cost of providing loans in rural areas

Regulation of the RRBs in India

The Reserve Bank of India (RBI) and the NABARD (National Bank for Agricultural and Rural Development)
are the two prime regulators of the RRBs in India.

 RBI: The RBI Act of 1934 and the Banking Regulation Act 1949 are the two main regulating
statutes for commercial banks in India.

 NABARD: It is the chief body set up for the regulation of the rural banking sector in India. It was
established on 12th July 1982 with an objective to improve the flow of funds from the urban
areas to semi-urban and rural parts of the country. NABARD is mainly responsible for
monitoring, planning activities, and policymaking of the credit system of the rural banks. It also
helps rural banks in their development and supervises such activities on a regular basis.

Functions of the RRBs in India

As the Regional Rural Bank is a scheduled commercial bank, it is primarily responsible for accepting
deposits and disbursing loans. The important functions of the RRBs are as below:

 Accepting deposits from members in current or savings accounts. They can also be made in fixed
or recurring deposits.
 Extending loans to the small and marginal farmers, craftsmen and artisans, medium and small
scale enterprises, housing, local traders, renewable energy, etc. that need development and
financial assistance.
 Disbursing wages is an important RRB function under the Mahatma Gandhi National Rural
Employment Guarantee Act (MGNREGA) and the Pradhan Mantri Gram Sadak Yojana (PMGSY).
It also disburses pensions under the poverty alleviation schemes.
 Providing agency services and general utility services to the customers
 Assisting in foreign exchange, money wire transfer, bill payments, etc
 Utility services like the ATM, issuance of debit cards, locker facilities, UPI, etc.

Conclusion

Regional Rural Banks (RRBs) play a crucial role in implementing government schemes and promoting
financial literacy in rural communities. RRBs also support rural economic growth by mobilizing savings,
disbursing loans, and offering various banking services.
 Q8. Write a note on Indigenous Banking?

Introduction

Indigenous banking in India refers to a banking system operated by private individuals or companies,
offering services like loans and deposits, but not under formal government regulation. These
"indigenous bankers" played a significant role in Indian finance, particularly in the past, and often
included various castes and communities.

The beginning of India’s indigenous banking system can be traced back to the Vedic period.

Difference between Indigenous Bankers and Money Lenders

Indigenous bankers are often confused with moneylenders, but they have a clear distinction. While
indigenous bankers, apart from providing loans, also accept deposits and deal in ‘hundis,’ which was
used as an instrument of exchange, while moneylenders provided loans but did not deal in ‘hundis.’

Methods of Indigenous Banking System

Some of the methods used in the indigenous banking system among the many are discussed below:

Promissory Note: Lending money on a promissory note is one of the common methods. The one who
wants to borrow money goes to a moneylender, negotiates an interest rate with him, and secures the
loan after signing a promissory note guaranteeing to pay the principal and interest on demand.

Dastavez: Dastavez, or bonds, are another type of security against which loans are granted. They are
written on legal forms that have been stamped and are correctly executed. Their unique feature is that
they record all of the loan’s terms in writing and in a detailed manner, increasing its reliability.

Rahan: It is also a widely known method and refers to borrowing money through a mortgage on a
property or land.

Functions of Indigenous Banking Systems

Advancing Loans: Indigenous bankers offer loans in exchange for land, jewellery, crops, and other
valuables. On the basis of promissory notes, loans are made to identified parties.

Discounting Hundis: One of the most significant functions of indigenous bankers is to discount hundis.
They write hundis, which are bills of exchange, and buy and sell them. These can be of two types:
Darshni or sight hundi, which is paid on-demand, and Muddati or time hundi, which is paid after the
period specified on the hundi.

Accepting Deposits: The indigenous bankers accept current accounts and fixed-term deposits from the
general mass. Local bankers also borrow money from commercial banks, acquaintances, relatives, and
even others.
Inland Trade Financing: They support both wholesale and retail traders within the country, assisting in
the purchase, sale, and movement of goods to various trading centres.

Remittance Services: Indigenous bankers offer remittance services as well, which is carried out by
sending a finance bill to one of their branches or an indigenous banker they are acquainted with.

Defects of Indigenous Banking System

1. Compared to the modern commercial banks, they are comparatively unorganised and not under
the control of the Reserve Bank of India

2. They adhere to traditional commercial practices, which involve a large amount of confidentiality
and very little system transparency

3. The majority of accounts are recorded in colloquial language, and they have not been audited or
made accessible to the general public

4. They mix banking with other profitable businesses such as speculating, brokerage and others

5. They include high-interest rates and even engage in many malpractices, like manipulating
accounts, deducting interest in advance and so on

6. Lack of a discount market- The limited use of hundis which are internal bills of exchange,
indicates the absence of a highly effective mechanism for connecting the indigenous to joint-
stock banking

Conclusion

As a result, we may conclude that the indigenous banking system aids in financing and developing
domestic trade. To cancel out the system’s defects, some ways of reform can be, indigenous bankers
performing only banking business and no other activity, keeping accurate account books in a regulated
and recognized form, and being registered with the Reserve Bank of India.
 Q9. Write a note on Agency Banking?

Introduction

Banks are financial institutions that perform deposit and lending functions. There are various types of
banks in India and each is responsible for performing different functions. The bank takes deposits at a
much lower rate from the public called the deposit rate and lends money at a much higher rate called
the lending rate.

Agency Bank or Agent bank

An "agency bank" is a bank authorized to handle transactions on behalf of another entity, such as the
government or a corporation. These banks act as agents, providing services like managing funds,
processing payments, and offering credit. They can be either domestic or foreign, with foreign agency
banks operating in a country other than their parent banks.

Purpose of Agency Banks

1. Expanding Reach and Financial Inclusion:

Agency banks help banks reach underserved populations, particularly in rural or low-income areas,
where traditional banking infrastructure is limited.

They facilitate financial inclusion by providing access to basic banking services, such as deposits,
withdrawals, and bill payments, to individuals who might otherwise be excluded from the formal
financial system.

2. Providing Services on Behalf of Others:

Agent banks can act as intermediaries for other financial institutions, offering services like managing
accounts, facilitating transactions, or providing access to specific products.

They can also handle tasks like collecting payments, distributing benefits, or managing investments on
behalf of other entities.

3. Streamlining Financial Services:

Agency banks leverage technology like POS devices and mobile phones to provide efficient and
convenient banking services, often at lower costs than traditional branches.

4. Enabling Interoperability and Network Effects:

Agency banks can act as part of a larger network, allowing customers to access services from multiple
financial institutions through a single agent.

This interoperability can lead to increased efficiency and convenience for customers, as they can
perform various transactions at different agent locations.
5. Supporting Financial Products and Services:

Beyond basic transactions, agency banks can be used to distribute more complex financial products,
such as loans, insurance, or investment products, to underserved populations.

Types of Agency Banks

1. Government Agency Banks: These banks handle financial transactions for the government,
including managing funds, making payments, and processing tax-related transactions.

2. Foreign Agent Banks: A foreign bank operating in a country under a different jurisdiction on
behalf of its parent bank is considered a foreign agent bank.

3. Corporate Agency Banks: These banks can assist corporations with various financial tasks, like
managing overseas operations, arranging loans, and handling international transactions.

Limitations of Agency Banking

1. Fraud and Security: Agency banking can be vulnerable to fraud, particularly in areas with weak
security measures or inadequate risk management frameworks.

2. Liquidity Issues: Ensuring sufficient cash availability at agent locations can be a challenge,
especially in remote or rural areas, impacting the ability to meet customer demands.

3. Technological Issues: Network instability, lack of electricity, and reliance on outdated

technology can hinder transactions and create inefficiencies.

4. Financial Literacy Gaps: Many individuals in underserved communities may lack the necessary
financial literacy to understand and utilize banking services, making adoption challenging.

5. Limited Scaling Opportunities: Scaling agency banking businesses can be difficult, especially
when dealing with occasional transactions or in rural areas with limited customer base.

6. Regulatory and Compliance Burdens: Stricter oversight and compliance requirements in some
regions can add to the operational costs and complexities of agency banking.

7. Confidentiality Concerns: Ensuring the confidentiality of customer information, especially in less

secure environments, can be a challenge in agency banking arrangements.

8. Agency Problem: The agency problem, where the agent's interests may conflict with the
principal's (the bank), can lead to suboptimal outcomes if not managed effectively.

Conclusion: Agency banking offers several benefits, including financial inclusion, reduced operational
costs for banks but is not free from potential limitations.
 Q10. Write a note on Agency services?

Introduction

Banks are financial institutions that perform deposit and lending functions. There are various types of
banks in India and each is responsible for performing different functions. The bank takes deposits at a
much lower rate from the public called the deposit rate and lends money at a much higher rate called
the lending rate.

What is Commercial Bank?

A commercial bank is a kind of financial institution that carries all the operations related to deposit and
withdrawal of money for the general public, providing loans for investment, and other such activities.
These banks are profit-making institutions and do business only to make a profit.

The two primary characteristics of a commercial bank are lending and borrowing. The bank receives the
deposits and gives money to various projects to earn interest (profit). The rate of interest that a bank
offers to the depositors is known as the borrowing rate, while the rate at which a bank lends money is
known as the lending rate.

Functions of Commercial Banks

The functions of commercial bank can be broadly classified into

1. Primary Functions
2. Secondary Functions

Agency Services of Banks

Agency services are one of the secondary functions of commercial banks. There are some agency
functions performed by commercial banks for which they charge some commission from their clients.
Some of these functions are:

1. Transfer of Funds: With the help of instruments like mail transfers, demand drafts, etc.,
commercial banks provide their customers with the facility of easy and economical remittance
of funds from one place to another.

2. Collection and Payment of Various Items: Commercial banks provide their customers with the
service of collecting bills, interest, subscriptions, rents, and other periodical receipts on their
behalf. They also make payments for insurance premiums, taxes, etc., on their customer's
standing instructions.

3. Purchase and Sale of Foreign Exchange: The central bank gives authority to commercial banks
to deal in foreign exchange. Commercial banks, on the behalf of their customers, buy and sell
foreign exchange and also helps in promoting international trade.
 4. Purchase and Sale of the Securities: Commercial banks engage in the purchase and sale of
securities for various purposes, including managing their own investments, providing services to
customers, and influencing the money supply. They buy and sell securities like bonds, shares,
and debentures, often on behalf of their customers. They also participate in Open Market
Operations (OMO), where the central bank buys or sells government securities to manage
liquidity in the banking system.

5. Income Tax Consultancy: Commercial banks provide advice to their customers related to
income tax. They also help them in the preparation of their income tax returns.

6. Trustee and Executor: Commercial banks play the role of a trustee and preserve the will of their
customers and as an executor, execute the will after their death.

7. Letters of Reference: A letter of reference from a commercial bank is a document that confirms
a customer's banking relationship and standing. It typically verifies the customer's identity,
address, and length of time as a client. These letters are often used for due diligence purposes,
to verify a person's identity and creditworthiness.

8. Portfolio management: In banks, portfolio management involves managing a collection of

investments, including loans, bonds, and securities, to maximize returns while managing risk.
This includes activities like asset allocation, security selection, risk management, and ongoing
monitoring and adjustment of the portfolio to achieve financial goals.

Conclusion:

Commercial banks are very important to the economy of the country as a whole. They are so important
to modern life that they are almost a necessity. They are at the centre of the money market.

Along with the core functions of Lending and Depositing money commercial banks perform a variety of
secondary functions which are crucial in providing ease of access to the consumers and general public.
 Q11. Write a note on IDBI?

Introduction

Industrial Development Bank of India (IDBI) is a specialised financial institution in India that plays a
crucial role in promoting industrial and infrastructure development in the country. It was established in
1964 under an Act of Parliament as a wholly-owned subsidiary of the Reserve Bank of India (RBI) and
was later transferred to the Government of India. IDBI serves as the principal financial institution for
providing long-term finance and credit to various industrial and developmental projects.

In 2005. IDBI was merged with IDBI bank and was categorised as a public sector entity. However, the
Reserve Bank of India in 2019 classified it as a private bank. Several national financial institutions, like
the Small Industries Development Bank Of India, National Stock Exchange of India, Exim Bank, etc., find
their roots in IDBI.

Small Industries Development Bank Of India

The Small Industries Development Bank Of India is wholly owned by IDBI. It was established as its
subsidiary in 1988 by the Act of Parliament and started operating in 1990. The IDBI gave the
responsibility of the small industry development fund and national equity fund to the Small Industries
Development Bank Of India. The Small Industries Development Bank Of India ( SIDBI ) evolved as a
financial institution and worked to promote and develop the MSME sector.

History of IDBI

The history of development banking can be traced back to the Great Depression in 1930 and Second
World War. The damage caused by the destruction created a demand for reconstruction, which led to
the establishment of national institutions.

Specialised Financial Institutions such as IDBI, NABARD, NHB, and SIDBI were formed to meet the
financial requirements in the industrial and agricultural sectors. IDBI was a wholly-owned subsidiary of
RBI in 1964, but its charge was taken over by the Union Government of India in 1976. And with this, IDBI
became the principal institution for coordinating financial activities for the development of the industrial
sector.

Objectives of IDBI

The objective of the IDBI includes:

 Coordinating, supervising, and controlling the activities of Finacial Institutions like ICICI, LIC, etc
 The Collection of resources for other financial institutions and providing financial assistance
 Planning and promoting key industries to enhance industrial growth
 To build a system that adheres to national priorities

Functions of IDBI
1. Project Financing: IDBI provides financial assistance to industrial and infrastructure projects. It offers
long-term loans and credit to companies and organisations for establishing new projects, expanding
existing ones, and modernising operations. This support helps in the growth and development of various
industries in the country.

2. Developmental Banking: As a developmental bank, IDBI plays a crucial role in fostering economic
growth and development. It works towards achieving the broader economic and social objectives of the
government by providing financial resources and expertise to key sectors of the economy.

3. Capital Market Operations: IDBI engages in capital market activities. This includes underwriting
securities, facilitating the issuance of bonds and stocks by companies, and participating in the capital
market, to raise funds for various purposes. These activities contribute to the efficient functioning of
India's capital markets.

4. Investment Banking: IDBI provides investment banking services, which involves advising companies
on mergers and acquisitions, capital restructuring, and other financial transactions. It acts as a financial
intermediary between businesses, helping them access capital and make strategic financial decisions.

5. Rural and Agricultural Development: IDBI extends financial support to rural and agricultural
development projects. It plays a role in funding initiatives aimed at improving rural infrastructure,
increasing agricultural productivity, and addressing rural poverty.

6. Retail Banking (through IDBI Bank): IDBI Bank, a subsidiary of IDBI, offers a range of retail banking
services to individuals and small businesses. This includes savings accounts, current accounts, personal
loans, home loans, credit cards, and other retail financial products and services.

7. Promotion of Priority Sectors: IDBI actively promotes and supports priority sectors identified by the
government, such as small and medium-sized enterprises (SMEs), export-oriented industries, and
sectors with significant employment generation potential.

8. Technical Assistance and Consultancy: IDBI provides technical and consultancy services to assist
industrial and infrastructure projects in areas like project planning, feasibility studies, and project
implementation.

9. International Operations: IDBI also has a presence in international markets and is engaged in financial
activities related to international trade and investment. The international operations of IDBI are aligned
with India's broader economic goals of increasing exports, attracting foreign investments, and expanding
the global footprint of Indian businesses.

Conclusion

The Industrial Development Bank of India (IDBI) has played a significant role in the economic
development of India by providing financial support to various industrial and infrastructure projects.
Over the years, it has diversified its operations to offer a wide range of financial products and services.
 Q12. Write a note on Accounting and Auditing in banks?

Introduction

Accounting is referred to as the process of recording, classifying, summarising and interpreting the
financial transactions, statements to determine the financial position of an organisation. Accounting is
also known as the specialised language of the business.

Auditing, on the other hand, is referred to as the process of examining the financial records such as
transactions and statements of an organisation in order to find any discrepancies during the process of
recording of the transactions and also to verify the accuracy of the records.

Accounting in Banking

Banking and accounting are intertwined, with banks relying on accounting practices to manage their
financial operations and provide services to clients

Key aspects of banking in accounting:

1. Financial Reporting: Banks create financial statements, including profit and loss accounts, balance
sheets, and cash flow statements, to report their performance to external parties and stakeholders.

2. Asset and Liability Management: Banks manage a wide range of assets, such as loans, investments,
and cash, and liabilities, such as deposits and debt, to ensure financial stability.

3. Transaction Recording: Accounting systems record all banking transactions, including deposits,
withdrawals, loan payments, and transfers, to maintain accurate records.

4. Compliance and Regulation: Banks are subject to various accounting and regulatory requirements,
ensuring adherence to accounting standards and banking regulations.

5. Customer Accounts: Accounting practices manage various types of customer accounts, including
savings, current, and loan accounts, tracking balances and transactions.

6. Interest and Fees: Banks calculate and record interest earned on loans and deposits, as well as service
fees, to accurately report profitability.

Different types of Audit

Banks utilize various types of audits to ensure financial integrity, compliance, and operational efficiency.
They are as follows:

1. Internal Audits:

Risk-Based Internal Audit: This type focuses on identifying and assessing risks within the bank's
operations and implementing controls to mitigate those risks.

Financial Audit: This type verifies the accuracy and reliability of the bank's financial records and reports.
Compliance Audit: This type ensures that the bank is adhering to relevant laws, regulations, and internal
policies.

2. External Audits:

Statutory audit in banks is a mandatory audit prescribed by law, like the Reserve Bank of India (RBI) and
the Banking Regulation Act, 1949, ensuring the accuracy of financial statements and books of account.
Chartered Accountants (CAs) conduct this audit, focusing on compliance with regulations and regulatory
guidelines.

Government Control over accounts and audit of banks

The Reserve Bank of India (RBI) is the primary regulator and supervisor of the banking system in India,
including bank audits. The RBI controls the audit through the following steps:

1. Statutory Audit: The Banking Regulation Act, 1949 mandates that banks undergo a statutory
audit. The RBI appoints auditors, often in coordination with the Institute of Chartered
Accountants of India (ICAI), to conduct these audits.

2. Special Audit: The RBI can order special audits of specific transactions or periods if it deems it
necessary in the public interest, or in the interest of the banking company or its depositors.
These special audits can be conducted by the bank's regular auditor or by a specially appointed
auditor.

3. Monitoring and Supervision: The RBI supervises banking companies through its Department of
Banking Supervision, according to RBI. This department monitors the performance of banks and
their auditors, and can take action if there are serious lapses or negligence in audit
responsibilities. The RBI also collects information from various institutions to assess the impact
of their operations on the overall economy.

4. Audit Reports and Transparency: Audit reports are submitted to the RBI and the bank. The RBI
may also share the audit reports with other relevant authorities. The goal is to ensure
accountability and transparency in the banking sector.

5. Comptroller and Auditor General (CAG): The CAG of India also has a role in auditing
government-owned banks and financial institutions, as well as those with government
involvement. The CAG's audit mandate covers various aspects of financial management and
public administration. The audit reports of the CAG are presented to the Parliament.

Conclusion: Accounting is vital for banks because it provides a systematic record of their financial
transactions, ensuring transparency, accountability, and compliance with regulations. It helps in
managing risk, making informed decisions, and reporting financial performance to stakeholders.
 Q13. Write a note on Reconstruction and Reorganization?

Introduction

Bank restructuring and reorganization refer to actions taken to revive failing banks or to reshape the
banking sector for greater stability. This involves strengthening viable institutions, resolving insolvent
ones, and improving the overall banking environment.

Reconstruction of Banks

"Reconstruction" generally refers to the process of reviving or rebuilding a financial institution or its
assets, often after a period of financial distress.

Methods of Reconstruction

1. Asset Reconstruction Companies (ARCs): These are financial institutions that purchase non-
performing assets (NPAs) or bad loans from banks and financial institutions. ARCs then work to recover
the value of these assets through various methods, such as debt restructuring, asset sales, or
enforcement of security interests.

2. Debt Restructuring: This involves modifying the terms of a loan agreement to make it more
manageable for the borrower. This can include reducing interest rates, extending repayment periods, or
converting debt to equity.

3. Asset Sales: Banks may sell off assets that are not performing as well to generate cash and improve
their balance sheet.

4. Insolvency Resolution: In severe cases of financial distress, banks may initiate insolvency proceedings,
which involve restructuring debts and assets under legal supervision.

5. Regulatory Framework: The Reserve Bank of India (RBI) plays a crucial role in regulating and
supervising the banking sector, including the implementation of reconstruction measures.

Example: National Asset Reconstruction Company (NARCL) and India Debt Resolution Company
(IDRCL):

In 2021, the Indian government announced the formation of NARCL and IDRCL, an ARC-AMC (Asset
Management Company) structure to address the issue of NPAs in the banking industry. NARCL is a
government-owned entity that acquires NPAs from banks, while IDRCL is responsible for resolving these
assets.

Reorganization of Banks

Bank reorganization, also known as restructuring, is a multifaceted process aimed at improving a bank's
financial health or addressing specific challenges.

Methods of Bank Restructuring:

1. Mergers and Acquisitions: Combining a troubled bank with a stronger one can help to transfer viable
assets and liabilities, while also providing the failing bank with resources to address its issues.

2. Recapitalization: Involves injecting capital into the bank to strengthen its balance sheet and improve
its financial position. This can be done through government support, private investment, or other
means.

3. Asset Transfers: Transferring viable assets to a healthier bank or agency can help to remove non-
performing assets and improve the financial health of the restructuring bank.

4. Liability Management: This involves managing the bank's liabilities, such as deposits, to ensure that
the bank can meet its obligations.

5. Operational Restructuring: Reorganizing the bank's activities, including closing branches or

departments, downsizing, or streamlining processes to improve efficiency and reduce costs.

6. Technology Restructuring: Modernizing the bank's technology infrastructure to improve its

operational efficiency and customer experience.

7. Debt Restructuring: Negotiating with creditors to modify the terms of debt, such as reducing interest
rates or extending repayment periods, to improve the bank's ability to repay its debts.

8. Governance Changes: Reforming the bank's board of directors or management structure to improve
oversight and accountability.

9. Loan Restructuring: Modifying the terms of existing loans to improve borrowers' ability to repay,
which can help prevent defaults and reduce the bank's non-performing loan (NPA) ratio.

10. Write-offs: In some cases, banks may need to write off non-performing assets to reduce their
balance sheet and improve their financial position.

11. Bankruptcy: In extreme cases, a bank may be forced into bankruptcy, where its assets are liquidated
and creditors are paid out according to their priority.

12. In-court Restructuring: Restructuring a company's capital structure with the involvement of a court,
often used when disagreements exist between creditors and the debtor.

13. Out-of-court Restructuring: Negotiating a restructuring agreement with creditors without involving
the court, allowing for a more flexible and potentially quicker resolution.

Conclusion

Bank Reconstruction and Reorganization are effective tools to eliminate the weaknesses in a bank and
allow them to survive in spite of challenges faced by the banks.
 Q14. Write a note on State Bank of India (SBI)?

Introduction

SBI is now India’s largest bank. It is a financial services firm that is a public sector bank with a global
nature. SBI, based in Mumbai, is the world’s 43rd largest bank. The bank is descended from the Bank of
Calcutta, created in 1806, making it the Indian Subcontinent’s oldest commercial bank. In total, the bank
was founded through the acquisitions and mergers of roughly twenty institutions over a while.

History of SBI

The Bank of Calcutta was founded in 1806 and became the forerunner of SBI in the first part of the
nineteenth century. Later, the name of this bank changed to the Bank of Bengal.

The Imperial Bank of India came into being in 1921 when the 3 banks, namely the Banks of Bombay,
Bengal, and Madras, merged. It conducted specific central banking tasks in conjunction with its normal
commercial banking activities until the Reserve Bank of India was established in 1935.

It gave up its central banking powers after the RBI (Reserve Bank of India) came into being. However, it
continued to operate as the Reserve Bank’s agent in places where the RBI did not have branches. The
government nationalized this bank in 1955 to create SBI or the State Bank of India.

Subsidiary banks of SBI

The seven subsidiary banks of SBI are:

1. SBM or the State Bank of Mysore

2. SBP or the State Bank of Patiala

3. SBBJ or the State Bank of Bikaner and Jaipur

4. State Bank of Saurashtra

5. SBT or the State Bank of Travancore

6. SBH or the State Bank of Hyderabad

7. State Bank of Indore.

These subsidiary banks were under SBI in 1955. However, in 1959, the State Bank of India (Subsidiary)
Act was passed, and all the seven subsidiaries of SBI were nationalized.

Functions of the State Bank of India

1. The State Bank acts as an agent for the Reserve Bank and fulfills the following tasks:
2. It serves as the government’s bank, collecting money and making payments on the government’s
behalf, as well as managing public debt.

3. It serves as a bank for bankers. It accepts deposits from commercial banks and lends them. It also
serves as a clearinghouse for commercial banks, rediscounting their bills of exchange and providing
remittance services.

4. It accepts the general public’s payments and deposits.

5. It offers loan facilities against qualified securities, including bills of exchange, goods, promissory
notes, real estate or title papers, fully paid corporate shares, debentures, and so on.

6. Corporate securities, government securities, treasury bills, and railroad securities are among the
investments it makes with its surplus cash.

Objectives of SBI

The State Bank of India, a State under Article 12, was formed to operate on standard commercial
principles. However, unlike the country’s other commercial banks, it considers and responds to the
financial needs of small scale industries and cooperative institutions. It especially caters to the rural
parts of the country progressively and liberally.

The State Bank’s key goals are as follows:

1. To behave according to the government’s broad economic policies.

2. Providing financial assistance to cottage industries and small-scale businesses.

3. To provide banking institutions with remittance services.

4. To promote rural credit and stimulate savings by setting up local branches in rural and semi-urban
areas.

5. To form a government-to-government collaboration to provide cooperative financing.

6. Provide financial assistance for the creation of licensed cooperative marketing associations and
warehouses.

Conclusion

State Bank of India (SBI) stands as a cornerstone of India's financial landscape, tracing its roots to the
early 19th century. Its evolution from presidency banks to a modern, diversified institution showcases its
adaptability and commitment. With a global presence, innovative digital solutions, and a history of
driving financial inclusion, SBI remains at the forefront of banking. Through strategic mergers,
technological advancements, and steadfast dedication to serving the nation, SBI has become an integral
part of India's economic growth story.
 Q15. Write a note on supervisory role of RBI?

Introduction

The Reserve Bank of India is the backbone of the Financial System of the country. It has been entrusted
by the people and the Government to control, supervise and promote the flow of money in the market.
It also takes part in planning and development to maintain economic stability of the country and take
the country towards growth.

Reserve Bank of India was established in 1935 and since then it has regulated the flow of Indian rupee in
the country. The Reserve Bank is also responsible for managing other commercial banks through its
various policies and directions.

Every bank is entitled to keep an amount of money with the RBI which serves as the limit to the amount
of money that bank can lend to the public. There are various other policies and rules through which RBI
keeps a check on the economy of the country.

Objectives of RBI

Being the backbone of the financial state of the country, RBI has various objectives as mentioned in the
RBI preamble. Some of them are listed below:

1. Primary Objectives: The primary objectives of RBI include:

A) Addressing the issue of Banknotes

B) Maintaining monetary stability in the country

C) To operate the credit system and currency in the country to its own advantage

2. Remain independent of the political influence: In order to maintain financial stability and promote
economic growth, RBI should be free from any political pressure and refrain from corrupted activities

3. Fundamental objectives: RBI should serve as a central authority and serve as:

A) Bank of all the other Commercial banks

B) Only authority that has note issuing power

C) Bank to the Government of India

4. Promote Economic Growth: RBI, along with maintaining price stability, should also design policies
which promote economic growth within the framework

Supervisory function of RBI

The Reserve Bank of India (RBI) has a critical supervisory role in overseeing the financial system,
ensuring stability and protecting depositors.
Key aspects of the RBI's supervisory role:

1. Licensing and Supervision:

The RBI grants licenses to banks and monitors their operations to ensure they comply with regulations
and maintain financial soundness.

2. Inspection and Audit:

The RBI conducts regular inspections and audits of banks to assess their financial health and compliance
with regulations.

3. Control over Non-Banking Financial Institutions (NBFIs):

The RBI has the authority to regulate and supervise NBFIs, ensuring they operate responsibly and don't
pose systemic risks.

4. Deposit Insurance:

The RBI implements a deposit insurance scheme to protect depositors' money in case of bank failures,
providing confidence in the banking system.

5. Financial Health Monitoring:

The RBI monitors the financial health of banks and takes corrective actions when necessary, including
issuing guidelines, appointing monitoring officers, and even revoking licenses.

6. Prompt Corrective Action (PCA):

The RBI uses the PCA framework to address issues with banks facing financial difficulties, taking steps to
ensure their stability.

Conclusion

RBI has 27 regional and 4 sub offices. Most of these offices are located in the state capitals to ensure the
right running of the state economy. It maintains the economy of a state through its capital. The Indian
economy and its regulation is in the hands of the RBI. It designs and promotes policies which can boost
our economy and help people grow substantially. It also keeps in mind to keep a check on price stability.

The Reserve Bank of India has a credit policy. The main aim of this policy is to ensure growth while
keeping price stability in check. Promoting growth means more goods are produced in India and more
services are provided in the country. This helps to increase GDP and has an overall positive impact on
the economy of India.
 Q16. Can a banker make profitable use of funds with him? If so narrate the methods?

Introduction

Diversified banks make money in a variety of different ways; however, at the core, banks are considered
lenders. Banks generally make money by borrowing money from depositors and compensating them
with a certain interest rate. The banks will lend the money out to borrowers, charging the borrowers a
higher interest rate and profiting off the interest rate spread.

Additionally, banks usually diversify their business mixes and generate money through alternative
financial services, including investment banking and wealth management. However, broadly speaking,
the money-generating business of banks can be broken down into the following:

1. Interest income

Interest income is the primary way that most commercial banks make money. As mentioned earlier, it is
completed by taking money from depositors who do not need their money now. In return for depositing
their money, depositors are compensated with a certain interest rate and security for their funds.

Then, the bank can lend out the deposited funds to borrowers who need the money at the moment. The
borrowers need to repay the borrowed funds at a higher interest rate than what is paid to depositors.
The bank is able to profit from the interest rate spread, which is the difference between interest paid
and interest received.

2. Capital markets income

Banks often provide capital markets services for corporations and investors. The capital markets are
essentially a marketplace that matches businesses that need capital to fund growth or projects with
investors with the capital and require a return on their capital.

Banks facilitate capital markets activities with several services, such as:

 Sales and trading services

 Underwriting services
 M&A advisory

3. Fee-based income

Banks also charge non-interest fees for their services. For example, if a depositor opens a bank account,
the bank may charge monthly account fees for keeping the account open. Banks also charge fees for
various other services and products that they provide. Some examples are:

 Credit card fees

 Checking accounts
 Savings accounts
 Mutual fund revenue
  Investment management fees
 Custodian fees

Use of funds

The use of funds available in the bank can be broadly classified into two categories

1. Non-Profitable funds

This includes Cash reserve with the central bank and cash reserve within the bank. These funds cannot
be used for profitability.

2. Profitable funds

These funds include loans and Investment that the bank uses to make profits.

Loans

Loans can be broadly classified as follows

1. Money at call and short notice: "Money at call and short notice" in banking refers to very short-term
loans (one day to a fortnight) that are easily accessible and repayable on demand or within a short
notice period. These funds are used by banks and other financial institutions to manage liquidity and
meet temporary funding needs.

2. Advances to customer: A bank advance is a short-term credit facility granted by a bank to a customer
to cover immediate financial needs, typically for working capital purposes. It differs from a traditional
loan in that it's intended for short-term usage, like covering daily expenses, and is usually repaid with
interest.

3. Discounting of bill of exchange: Discounting a bill of exchange involves a business selling its
outstanding bills (also known as trade receivables) to a bank or financial institution at a discounted rate
before the due date, effectively obtaining immediate cash. This is a form of short-term financing,
allowing businesses to access funds quickly while still earning the full face value of the bill at maturity.

4. Cash credit: Cash credit (CC) is a short-term financing facility provided by banks to businesses,
enabling them to borrow funds up to a specified limit, often used for working capital needs. It functions
as a revolving credit facility, meaning businesses can withdraw, repay, and borrow again within the set
limit. Unlike traditional loans, interest is typically charged only on the amount utilized, not the entire
sanctioned limit.

5. Overdraft: An overdraft is a credit facility that allows a bank account holder to withdraw more money
than they actually have in their account, up to a pre-approved limit. It's essentially a short-term loan
from the bank, used to bridge temporary cash flow gaps or cover unexpected expenses.

Investments
Investments can be broadly classified as follows:

1. Government securities: Government securities, also known as G-Secs, refer to the debt instruments
issued by the government to finance its fiscal requirements. These securities are backed by the
government's guarantee of repayment and are considered risk-free investments.

2. Treasury bills: Treasury bills are money market instruments issued by the Government of India as a
promissory note with guaranteed repayment at a later date. Funds collected through such tools are
typically used to meet short term requirements of the government, hence, to reduce the overall fiscal
deficit of a country.

3. Treasury bonds: Treasury bonds are debt securities issued by the government. Essentially, you're
loaning money to the government by purchasing a bond at a predetermined interest rate. In turn, the
government will pay you a fixed interest rate for a set duration of time.

4. Foreign government bonds: Foreign government bonds are debt securities issued by a national
government in a foreign country. These bonds are typically denominated in the local currency of the
issuing government and can be an attractive option for investors looking to diversify their portfolios
globally.

5. Corporate Bonds: Corporate bonds in banking refer to the practice where banks invest in debt
securities issued by corporations. These bonds are a way for companies to raise capital, offering
investors regular interest payments and the return of their principal at maturity. Banks, being financial
institutions with a need to invest their reserves, often include corporate bonds in their portfolios.