Comprehensive Introduction to Banking and Reserve Bank of India Services
Syllabus Overview
Module-1: Introduction to Banking
Origin of the word 'Bank', Meaning and definition of bank.
Classification of banks.
Functions of Commercial bank.
Services of bank in modern times.
Electronic-banking.
Digital payment: Importance, advantages, benefits, disadvantages, and barriers.
Module-2: Reserve Bank of India (RBI)
Management of Reserve Bank of India.
Banking operations.
Types of accounts.
Operational banking services.
Financial inclusion.
Current scenario in banking services.
Recent trends of Banking system of India: features, characteristics, scope, and need for banking.
Need for regulation and supervision.
Features of debit cards and credit cards.
Significance of Electronic banking.
Origin of the Word 'Bank'
The business of banking originated in different parts of the world at different times formally, leading to a difference of opinion regarding the origin of the word "Bank."
The word "Bank" seems to have derived from the Italian word "Banco" at the time of the establishment of the Bank of Venice in . At this time, the Germans were influenced by Italy.
"Banck" was the German word for joint stock of funds, meaning a heap or mound. The Italians converted the word into "Banco," which denotes an accumulation of either stock or money.
Another group of people believes that the word bank has been derived from the word "Bancas" or "Banque," which denotes a bench. In ancient times, Jews transacted their money-changing business at the marketplace while sitting on benches.
When a banker was unable to meet his obligations, the bench on which he was carrying on banking business was broken into pieces. This practice is cited as the origin of the word "bankrupt."
The first view—linking the word to the establishment of the Bank of Venice in —is considered more convincing and identifies that institution as the first to be regarded as a bank.
Meaning and Definition of Bank
The definition of a bank varies from country to country. Attempting to define the term is difficult because it is impossible to include all functions performed by modern bankers in a single definition, especially given the large number of functions they now discharge.
Leading authors on banking have tried to define the term based on decided cases.
Definition by Dr. Herbert Hart: In his book "Law of Banking," he states: "A banker is one who in the ordinary course of business honors cheques drawn on him by a person from and for whom he receives money on current accounts."
According to this definition, for a person, firm, or institution to be regarded as a banker, they must perform two functions:
Receiving current deposits.
Permitting the depositors to draw cheques against their deposits.
Definition by Sir John Paget: He is another great authority who prescribes four functions for an entity to be regarded as a banker:
Take deposit accounts.
Take current accounts.
Issue and pay cheques.
Collect cheques, both crossed and uncrossed, for customers.
English Common Law Definition: A banker is defined as a person who carries on the business of banking, which includes:
Collecting currents for its customer.
Paying cheques drawn on him.
Collecting cheques for his customer.
Classification of Banks (Types of Bank)
Banking institutions may be classified on the basis of ownership and the functions they perform.
Classification on the Basis of Ownership:
Private Bank: Owned by one or more individuals.
Public or Incorporated Banks: These are incorporated under any act and are owned by shareholders.
Classification on the Basis of Functions (Financial Functional Classification):
As considerable specialization has occurred regarding banking activities, institutions are classified as:
Commercial banks.
Industrial banks (also referred to as Industrial or Investment banking).
Development banks.
Agriculture banks.
Saving banks.
Exchange banks.
Central banks.
Descriptions of Banking Types
Commercial Bank:
These are financial institutions that accept deposits from the public, repayable on demand, and lend them for short periods.
They borrow money in the form of deposits at a lower rate of interest and lend it at a higher rate, making a profit for themselves.
They are recognized for their capacity to create money in the form of demand deposits (liquid funds instantly available via mobile banking, debit cards, and cheques).
Industrial Bank:
Established to provide long-term financial requirements to industries.
Commercial banks cannot lock up funds for long periods as they focus on deposit banking, leaving industrial/investment banking to specialized institutions.
India has a number of financial institutions that specifically finance industries.
Development Bank:
Specialized financial institutions engaged in providing financial and other assistance for medium and long-term developmental activities in identified sectors.
The most important difference between a development bank and a commercial bank is that the former provides long-term capital, while the latter provides working capital to industries.
Agriculture Bank:
Specialized institutions intended to provide agricultural loans. Commercial banks are typically only prepared to give money if securities are available.
Land is often the only security farmers can offer, but land is considered a most unsuitable security for commercial bank advances.
As commercial banks distance themselves from large-scale agricultural lending, specialized financial institutions called agriculture banks have taken up this task.
Saving Banks:
A device for pooling the scattered savings of a community into a common reservoir. Different types exist globally, including:
Mutual or trustee saving banks.
Stock saving banks.
Post office saving banks.
Municipal saving banks.
Exchange Bank:
Specialized institutions to finance foreign trade.
Foreign trade differs from inland trade because settlements require the conversion of one currency into another. Exchange banks tackle the problems involved in this conversion process.
They provide the necessary currency for making international payments.
Central Bank:
A monetary institution standing at the top of all institutions functioning in a country.
It controls all banking institutions and is usually the basic source of the nation's funds.
It has the monopoly right of note issue.
It is responsible for maintaining the internal and external value of the national currency.
It is considered the cornerstone of the modern banking system.
It does not serve citizens or businesses directly; it acts as a banker to the government and a banker to other banks.
Functions of Commercial Banks
Commercial banks play a significant role in all economic activities of a nation. Their functions are classified into primary and secondary categories.
Primary Functions:
Accepting Deposits: One of the most important primary functions. Modern banks accept three types of deposits:
Current/Demand Deposits: Usually opened with a pre-subscribed minimum balance. Any amount can be deposited, and funds are withdrawn by cheque. These are generally opened by business houses.
Saving Deposits: Maintained to pool small savings from low and middle-income groups. It is a device to encourage people to earn a fixed income every month. Certain restrictions exist on the opening and operation of these accounts.
Fixed Deposits (Time Deposits): Beneficial to both the banker and depositor. Depositors get a higher rate of interest. Bankers prefer them because they retain the money for long periods, allowing for higher returns on investments.
Lending Money: Banks provide a channel for individual savings to be given to commerce and industry for productive purposes. The popular forms of lending are:
Overdraft.
Cash credits.
Loans and advances.
Discounting of bills of exchange.
Secondary Functions:
Agency Services: The bank acts as an agent for its customer, performing:
Collection of cheques, bills, drafts, and other obligations.
Execution of standing orders.
Conducting stock exchange transactions (buying and selling securities).
Acting as executors and trustees.
Providing income tax services.
Conducting foreign exchange and trustee business.
General Utility Services: Modern banks provide facilities beyond traditional banking, such as:
Safe keeping of valuables (Lockers).
Issuance of commercial letters of credit and travellers cheques.
Collecting trade information from foreign countries.
Arranging business tours and providing investment advice.
Securing admission for customers' children in foreign universities.
Services of Bank in Modern Times
Credit Cards:
Made of plastic material with a specimen of the cardholder and embossed information.
Designed to avoid cash or cheques and provide credit to the cardholder.
Usable only in establishments that have agreed to accept them.
The credit card organizer makes payments to the establishment and sends a monthly invoice to the holder for all purchases.
Origin: The use of credit cards originated in the US during the .
The first Universal Credit card was introduced by diners club in .
Later, the bank credit card system was innovated, where the bank credits the merchant's account and bills the cardholder later.
Examples include VISA card, mastercards, and maestro cards, which are linked to global payment systems.
Debit Cards:
Plastic money is slowly replacing paper money because carrying cash is risky.
Debit cards are an electronic product introduced by developed countries like the USA.
Advanced over ATM cards because they can be used at specific bank branches and often do not require a PIN (Personal Identification Number) at any register (though they are presented to merchants and a slip is signed).
Transaction money is immediately transferred from the cardholder's account electronically.
Requires a Point of Sale (POS) terminal, a hardware device at merchant counters that reads the card.
The machine automatically checks the account balance and reduces the transaction amount instantly. The merchant receives credit for the transaction the next day.
Electronic Banking (E-banking)
Information technology (IT) has revolutionized life, and the world is entering the Information Age or Net Age.
The internet is an interconnection of computer communication networks covering the world.
The growth of the internet and IT led to the emergence of E-commerce, which is essentially the paperless exchange of business information through devices like electronic data interchange or eBay.
Banking tools such as the internet, extranet, and intranet created network-based technology for commercial transactions.
E-banking implies performing basic transactions by customers globally through an electronic medium.
Modern banking is information-based and speedy due to the impact of the E-revolution.
Virtual Banking (Digital Banking):
Denotes banking and related services provided through IT without direct resource to physical bank branches by customers.
Salient features: Reliance on IT and the absence of physical bank branches to deliver services.
Banking is becoming more of a science than an art in the era of the digital economy.
Digital Payment
Digital payments are essential payments conducted through an electronic, internet-enabled medium.
Customers complete transactions through internet-enabled services or devices to access savings accounts and conduct activities such as fund transfers.