Introduction to Banking and Basic Functions of a Banker

Definition of Banking & Basic Functions of a Banker

Banks are essential financial institutions that handle money and its substitutes while providing various financial services. They primarily accept deposits from the public and utilize those funds to make loans, earning a profit through the difference between the interest rates they pay to depositors and the interest rates they charge to borrowers.

Primary Reasons for Using a Bank Account

• Safety: Storing earnings at home is risky due to potential theft, floods, or fire. Banks offer a secure environment for money and moveable assets like jewels and documents.

• Convenience: Accounts provide access to funds from anywhere, facilitating bill payments, transfers, and other financial transactions.

• Interest Earnings: Banks pay depositors for placing money with them, known as interest on deposits.

Legal Definitions under the Banking Regulation Act (BR Act), 1949

• Banking (Section 5(b)): "Banking means accepting for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise."

• Banking Company (Section 5(d)): "Banking Company" refers to any company transacting the business of banking in India. This includes foreign companies as defined in the Companies Act, 2013.

• Key Characteristics of a Banking Company:

  • Accepts deposits for lending or investment.

  • Deposits are payable on demand (e.g., Savings Bank and Current Accounts) or after a period (e.g., Fixed Deposits).

  • Funds are withdrawable by cheque or other instruments.

Basic Functions of a Banker

A banker is a financial expert providing advice on loans, investments, securities, and savings to solve client needs and increase firm profits.

Core Responsibilities

• Keep Records: Bankers record daily financial transactions and review bank statements and loan applications. This helps detect fraudulent activities and ensures smooth management. Confidentiality and safe filing are mandatory.

• Advise Clients: They answer financial questions via phone or face-to-face meetings, offering programs to help clients reach monetary goals. Their expertise is measured by the success of this advice.

• Gather Financial Information: Bankers collect data from new and existing clients to check creditworthiness. This information determines if the bank can meet the client's needs and helps in making informed lending decisions to people with low default risks.

• Disburse Funds: This involves processing withdrawals, deposits, and loan applications. Bankers often use money counting machines to eliminate human error and increase speed.

• Enforcing Security:

  • Counterfeit Detection: Using detectors to identify fake bills and checks.

  • Identity Verification: Verifying the identity of clients during withdrawals to prevent fraud.

  • Vault Security: Locking bank vaults to protect valuables, money, and documents from theft, fire, or natural disasters.

Banking System in India

The banking structure is headed by the Reserve Bank of India (RBI), which is the Central Bank of the country.

Public Sector Banks (PSBs)

PSBs are banks where the majority stake is held by the government. There are approximately $27$ PSBs in India, including $21$ Nationalised banks and the State Bank group.

• State Bank of India (SBI) History:

  • In $1921$, the Presidency Banks of Bengal, Bombay, and Madras merged to form the Imperial Bank of India.

  • On $1$ July $1955$, it became the State Bank of India.

  • The State Bank of India (Subsidiary Banks) Act, $1959$, turned banks from former princely states into eight associates/subsidiaries.

  • In $2008$, the Government of India acquired the RBI's stake in SBI to remove conflicts of interest with the regulatory authority.

• Nationalisation Rounds:

  • 1969: Prime Minister Indira Gandhi nationalised $14$ major banks with deposits totaling $50$ crores. This brought $84\%$ of branches under government control.

  • 1980: Six additional banks were nationalised with deposits of approximately $200$ crores, bringing $91\%$ of the branch network under government control.

• Objectives of Nationalisation:

  • Breaking the ownership/control of banks by a few business families.

  • Preventing concentration of wealth.

  • Mobilizing savings from the masses nationwide.

  • Catering to priority sectors.

Private Sector Banks

• New Private Sector Banks: Opened after the $1991$ economic reforms (e.g., HDFC Bank, ICICI Bank, Axis Bank).

• Old Private Sector Banks: Opened prior to $1991$ (e.g., J & K Bank, Development Credit Bank, Karnataka Bank, South India Bank).

Other Bank Categories

• Foreign Banks ($43$): Incorporated abroad but operating branches in India (e.g., Citibank, Bank of America).

• Regional Rural Banks (RRBs): State-sponsored, rural-oriented banks focused on agriculture. NABARD is the apex body. Ownership is split: Government of India ($50\%$), Sponsor Public Sector Bank ($35\%$), and State Government ($15\%$).

• Co-operative Banks: Governed by the Co-operative Credit Societies Act, $1904$ (amended $1912$). They operate on mutual help principles. Structure:

  • State Cooperative Bank (Apex level).

  • Central Cooperative Banks (District level).

  • Primary Cooperative Banks (Local level).

New Initiatives and Niche Banks

• New Licenses: Licences were issued to IDFC Limited and Bandhan Financial Services Private Limited in $2013$.

• Jan Dhan Yojna: Started by PM Narendra Modi on $28$ August $2014$ to provide bank accounts and credit facilities to the unbanked.

• Payment Banks: In $2015$, the RBI gave "in-principle" licences to $11$ entities, including Airtel M Commerce Services, Department of Posts, and Paytm. These entities have $18$ months to fulfill requirements before being granted full licenses under Section $22$ of the BR Act, $1949$.

• Small Finance Banks: Niche banks providing basic service like deposits and lending to unserved sectors (small business, marginal farmers). In Sept $16$, $2015$, $10$ applicants received "in-principle" approval, including Au Financiers (India) Ltd., Capital Local Area Bank Ltd., and Ujjivan Financial Services Pvt. Ltd.

Reserve Bank of India (RBI)

Organization and Structure

• Central Board of Directors: Comprises the Governor, $4$ Deputy Governors, and $15$ Directors nominated by the Union Government.

• Headquarters: Mumbai.

• Regional Offices: $27$.

• Training Establishments:

  • College of Agricultural Banking (Pune).

  • Reserve Bank of India Staff College (Pune).

  • National Institute for Bank Management (Pune).

  • Indira Gandhi Institute for Development and Research (Mumbai).

  • Institute for Development and Research in Banking Technology (IDRBT) (Hyderabad).

• Subsidiaries:

  • Deposit Insurance and Credit Guarantee Corporation of India (DICGC).

  • Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL).

Main Functions of RBI

• Monetary Authority: Formulates and monitors monetary policy to maintain price stability and ensure credit flow. Instruments include:

  • Cash Reserve Ratio (CRR): Quantum of cash banks must keep with RBI.

  • Statutory Liquidity Ratio (SLR): Amount banks must invest in government securities.

  • Liquidity Adjustment Facility (LAF): Manages day-to-day liquidity via Repo Rate (rate at which RBI lends to banks) and Reverse Repo Rate (rate at which banks park excess funds with RBI).

• Regulator and Supervisor: Prescribes parameters for banking operations to maintain public confidence and protect depositors.

• Manager of Foreign Exchange: Manages the Foreign Exchange Management Act (FEMA), $1999$, to facilitate external trade.

• Issuer of Currency: Issues, exchanges, and destroys currency/coins to ensure adequate supply of high-quality notes.

Developmental and Settlement Initiatives

• Computerization: Reduces clearing and settlement time.

• Mechanization: Introduction of MICR (Magnetic Ink Character Recognition) code.

• High Value Clearing (HVC): Faster clearing of large value cheques for same-day settlement.

• Cheque Truncation System (CTS): Eliminates physical movement of cheques for efficiency and security.

• Electronic Clearing Service (ECS): Uses electronic instructions for fund transfers.

• National Electronic Clearing Service (NECS): Facilitates multiple credits against a single debit.

• Electronic Funds Transfer (EFT): Enables electronic transfer between account holders across participating banks.

• Real Time Gross Settlement (RTGS): Settles inter-bank and customer transactions above rupees one lakh ($1,00,000$).