MODERN BANKING SYSTEM IN INDIA

BANK AND BANKING

A bank is a financial institution that serves as a financial intermediary.

Functions of bank are known as banking.

Evolution of Banking in IndiaPresidency Banks: Bank of Bengal in

1809,Bank of Bombay in 1840 & Bank of Madras in 1843

Imperial Bank of India -1921Reserve Bank of India-1935State bank of India-1955Nationalisation of 14 Banks-1969Second Dose of Nationalisation –1980Narasimham Committee Reforms-1990sICICI Merger- 2003

Indian Banking Sector:overviewEconomy grew by 8.5% in the last fiscal,central bank raised interest rates 7 times,increasing the repo rate by 1.75% ,the reverse repo rate by 2.25%,Indian foreign exchange reserve were

US$314.6 BILLION as on july 8,2011

Significance of BanksSavings MobilisationRemittance of FundsWell Developed

Money marketDevelopment of

Capital Market

Public FinanceFinancing the

NationRisk Free

InvestmentCorporate ServicesSocial Banking

Composition of Indian Banking SystemReserve Bank of

IndiaCommercial BanksDevelopment BanksRegional Rural

BanksCo-operative BanksNABARDLand Development

BanksExim Banks

COMMERCIAL BANKS

Functions of commercial banks

A. Primary Functionsa) Accepting Depositsb) Advancing Loans

B. Secondary Functionsc) Agency Functions d) General utility Services

a) Accepting Deposits1) Fixed or Time Deposit Account2) Current or Demand Deposit Account 3) Saving Deposit Account 4) Home Safe Saving Account 5) Recurring Deposit Account

b) Advancing Loans

1) Cash credit2) Overdraft3) Demand Loans4) Short Term Loans

Secondary FunctionsOf Commercial banks

Besides many primary functions, these banks also perform many secondary functions..

1. Agency functions:Banks act as an agent to their

customers in different ways. 2. General Utility Services:

Banks also provide certainservices of general utility.

AGENCY FUNCTIONSI. Collection and payment of various items:

Bank collect cheques,rent,interest and also make payment of taxes, insurance premium.

II. Purchase of sale and security:Banks are more knowledgeable with regard of stoke and share business, they provide security to their customers.

III. Trustee and Executer:Banks also acts as trustees and executers of the property of their customers.

IV. Remitting of Money:Banks remit money at distance place though bank drafts.

V. Purchase and sale of foreign exchange:Banks buy and sell foreign exchange, promoting international trade.

VI. Letter of Reference:Banks give information about economic position of customers to domestic and foreign traders.

VII. Underwriting:Banks Underwrite the sale of new shares.

GENERAL UTILITY SERVICESI. Locker facilities:

Banks provide locker facilities to their customers.

II. Traveler’s cheque and Letters of credit:Banks issue traveler's cheque and letters of credit to avoid the risk of carrying cash.

III. Business Information and Statistics:Banks give advice to customers on financial matters.

IV. Help in Transportation of goods:Banks help big businessmen and industrialists in transportation of goods from production centre to consumption centers.

Difference b/w primary and secondary functions:Primary Functions1.These are the main activities of the bank.2. These are the main source of income of the bank.3.These are obligatory on the part of bank performance.

Secondary functions1.These are the secondary activities of the bank.2. These are not main source of income of the bank.3.These are not obligatory on the part of bank performance.

Reserve Bank of India

Central Bank :

It is an apex institution of the monetary and banking structure of a country. A central bank has the authority to regulate and control the banking business and monetary system of a country.

Central bank of india is Reserve Bank of India. RBI was set up in 1935 under the RBI act of 1934.It was nationalized in 1949.

Main functions of RBI are

• Bank of issue• Financial advisor to the state( banker also)• Banker to bank• Custodian of foreign exchange reserves• Lender of the last resort• Bank of central clearance and transfer• Controller of credit

Controller of credit

1.Quantitative Methods

• Bank rate policy• Open market operation• Variable reserve ratio

2. Qualitative control

• Margin requirement• Credit Rationing• Regulation of consumer credit• Direct action.

Banking InnovationsRetail BankingBank as authorized dealerCustomer serviceLead Bank schemeService area approachMicro financeConsortium approachCredit cards Local Area Banks