Introduction to Banking Services

• Banks are business offices that conduct financial activities with visitors and officers
• Banks accept cash deposits and provide cash withdrawals
• Banks can provide loans for businesses and other purposes

Objectives of Studying Banking Services

• State the meaning of 'Bank'
• Explain the role of 'Banking'
• Identify the different types of Banks
• Describe the functions of a commercial Bank

Meaning of Bank

• A bank needs authorization from a Government to accept deposits, pay interest, clear checks, advance loans and act as a financial intermediary
• Banks enable people to meet expenses on food, clothing, education, housing etc
• Banks encourage people to save money out of their present income to meet future expenses on marriage, build houses etc

Banking services

• Banks provide a place people can put their money with the assurance of security of the funds, and the availability of the funds when required
• Banks are financial institutions that accept deposits and channel money into lending activities
• Banks are lawful organizations that accept deposits that can be withdrawn on demand and lend money to individuals and business houses
• Banks render additional services, such as collecting bills, paying foreign bills, safe-keeping jewelry, and certifying business credit worthiness
• Banks give two assurances to depositors: Safety of deposits and Withdrawal of deposits
• Banks give interest on deposits, which promotes saving habits among the public and increases the original amounts
• Banks grant loans and advances to farmers, traders, and businessmen for productive purposes
• Banks charge interest on loans, and it is generally higher than the interest on deposits
• Income for banks comes from interest on loans and fees for services, which exceeds the interest allowed on deposits
• Banking involves acceptance of deposits, lending money, and facilitating business activities
• Banking provides auxiliary services to trade, facilitates the exchange of production of goods and services between the buyer and seller
• Laws regulate banking activities in a country, so depositing and borrowing money are legal transactions
• Banks are under the control of the government, so get the trust and confidence of people
• Banks rely on public confidence and cannot survive without

Difference Between Banks and Moneylenders

• Unlike banks, moneylenders do not accept deposits from others
• Banks perform two main functions by accepting deposits and lending money
• Moneylenders advance money from their private wealth

Role of Banking

• Banks play a vital role in the development of a nation by providing funds for businesses
• Banks encourage saving habits, act as intermediaries for people between those who have surplus money and those who need money for different business activities
• Banks facilitate receipts and payments by checks as opposed to the use of currency.
• Banks provide capital for businesses for short or long term
• Banks also facilitate import export transactions.
• By providing credit to farmers, small-scale and large industries, banks help balanced the economy.
• Banks helps raising standard of living by providing loans for purchasing durable goods, homes, automobiles, etc

Types of Banks

• Banks in India meet financial requirements of agriculture, business, and other categories

Central Banks

• Central Banks guide and regulate the banking system of a country
• Central banks do not deal with the general public but operate as a Government banker by maintaining deposit accounts, advancing money to other banks when needed, and providing guidance
• India's central bank is the Reserve Bank of India (RBI)
• Central Banks maintain records of Government revenue and expenditure, advise the Government on monetary and credit policies, and decide on the interest rates for Bank deposits and loans
• Foreign exchange rates are determined by the central Bank
• Central Banks issue currency notes, regulating their circulation, with no other Bank being able to do so

Commercial Banks

• Commercial Banks accept deposits and grant short-term loans to their customers
• Commercial banks give give medium-term and long-term loan to business enterprises as well as providing long-term housing loans
• Types of Commercial Banks: Public sector banks, Private sector Banks and foreign Banks
• Public Sector Banks: Banks where majority stake is held by the Government of India or Reserve Bank of India (e.g. State Bank of India, Canara Bank)
• Private Sector Banks: Banks where majority share capital is held by private individuals and registered as companies with limited liability (e.g. Jammu and Kashmir Bank Ltd., ICICI Bank Ltd)
• Foreign Banks: Banks that are registered and have their headquarters in a foreign country but operate their branches in India (e.g. Hong Kong and Shanghai Banking Corporation (HSBC), Citibank, American Express Bank)

Development Banks

• Development Banks help businesses that often require medium and long-term capital for purchasing machinery and equipment, using latest technology, or for expansion and modernization
• Development Banks undertake other development measures such as Public Sector Banks and State Bank of India and its 7 associate Banks subscribing to the shares and debentures
• Industrial Finance Corporation of India (IFCI) and State Financial Corporations (SFCs) are development banks in India.

Co-operative Banks

• Co-operative Banks are financial entities which belong to its members, who are at the same time the owners and the customers of their bank
• Cooperative banks formed by persons that come together to jointly serve their common interest under the Co-operative Societies Act
• Co-operative Banks have to obtain a license from the Reserve Bank of India before starting banking business
• Co-operative Banks must follow the guidelines issued by the Reserve Bank of India., and function under the overall supervision of the Registrar
• Types of Co-operative Banks operating in India: primary credit societies, central co-operative banks and state co-operative banks
• These banks are organized at the village, town, district, and state levels
• Primary Credit Societies: village or town level that are formed with borrower and non-borrower members residing in one locality and restrict their operations to watch activities to prevent frauds.
• Central Co-operative Banks: district level that provide loans for their members, who are primary credit societies belonging to the same district and functioning as a link between the primary credit societies and state co-operative banks
• State Co-operative Banks: apex level co-operative banks that help mobilise funds and help with channelization among various sectors, and for individual borrowers from the state co-operative banks through the central co-operative banks and the primary credit societies

Specialised Banks

• Specialised Banks cater to the requirements and provide overall support for setting up business in specific areas of activity such as EXIM Bank, SIDBI and NABARD
• EXIM Bank: supports or establishes businesses for exporting products abroad or importing products from foreign countries for sale. It grants loans to exporters and importers, also provides information about the international market and the faced competition
• Small Industries Development Bank of India (SIDBI): helps establish a small-scale business unit or industry, on easy terms. SIDBI promotes modernization of small-scale industrial units, use of new technology and market activities, and is to promote, finance and develop small-scale industries
• National Bank for Agricultural and Rural Development (NABARD): a central or apex institution for financing agricultural and rural sectors. NABARD provides credit, both short-term and long-term, through regional rural banks for people who are engaged in agriculture or other activities like handloom weaving, fishing, etc

Functions of Commercial Banks

• Primary functions, and Secondary functions

(A) Primary Functions

• All Banks which are known as Banks provide these primary functions
• Primary functions of a commercial bank include: accepting deposits, granting loans and advances

Accepting Deposits

• An activity of a commercial Bank is to collect deposits from the surplus income and savings from the public
• People deposit money in Banks and earn interest

Grant of Loans and Advances

• To grant loans and advances to members of the public and the business community at a higher rate of interest than allowed by banks on various deposit accounts. he rate of interest charged on loans and advances varies according to the purpose and period of loan and also the mode of repayment

Loans

• A loan is granted for a specific time period.
• Commercial banks provide short-term loans
• The borrower may be given the entire amount in lump sum or in installments against the security of certain assets. A loan is normally repaid in installments
• Loans can be granted repaid in installments or lump sum

Advances

• Banks grant for a short period of time to meet the customers' requirements
• The rate of interest charged on advances varies from bank to bank, and only on the amount withdrawn

Types of Advances

• Cash credit, overdraft and bill discounting bills of exchange

Cash Credit

• Banks allow the borrower to draw amount upto a specified limit, then amount is credited to the account of the customer to withdraw and charge interest on amount actually withdrawn

Overdraft

• Overdrafts are a credit facility granted by the bank that allows a customer with a current account at the bank to withdraw more than the amount of credit balance in the account
• Overdraft facility with a specified limit is allowed either on the security of assets, or on personal security, of both

Discounting Bills of Exchange

• Banks provide short-term finance by discounting bills and deducting a certain rate of discount and making payment of the amount before the due date of the bills
• The funds are transferred to a third party and the bank recovers the amount if it is dishonoured

(B) Secondary Functions

• Secondary functions occur in addition to primary functions
• Secondary functions: Issuing letters of credit, travellers' cheque, etc
• Secondary functions: Undertaking safe custody of valuables, important document and securities by providing safe deposit vaults or lockers
• Secondary functions: Providing customers with facilities of foreign exchange dealings
• Secondary functions: Transferring money from one account to another; and from one branch to another branch of the bank through cheque, pay order, demand draft
• Secondary functions: Standing guarantee on behalf of its customers, for making payment for purchase of goods, machinery, vehicles etc

Central Bank

• The Reserve Bank of India was established on April 1, 1935, and originally established in Calcutta but was permanently moved to Mumbai in 1937
• The Central Office is where Governor sits and where policies are formulated
• Initially privately owned, but since 1949, owned by the Government of India
• The main function is the general superintendence and direction of Bank's affairs, and advise the Central Board on local matters and to represent territorial and economic interests of local banks

Bank Deposit Account

• Banks engage in acceptance of deposit from the public for the purpose of lending to others
• Money deposited is mostly a saving of the people that can be saved for future needs and be safe while generating a return

Types of Bank Deposit Accounts

• Banks offer different deposit accounts for people to suit their purpose and convenience: Savings Bank Account, Current Deposit Account, Fixed Deposit Account, Recurring Deposit Account

a. Savings Bank Account

• Most suited for people with limited income and want to save money for future needs
• Account can be opened with a minimum initial deposit that varies, and money can be deposited any time
• Withdrawals are made by withdrawal form, cheque, or ATM card
• Banks restrict the number of withdrawals from this account, and interest is allowed on balance of deposit
• A minimum balance has to be maintained

b. Current Deposit Account

• Intended for Big businessmen, companies, schools, colleges, and hospitals
• Banks open accounts where withdrawals can be made an infinite amount of times
• A minimum amount of deposit required while opening the account
• On this deposit bank does not pay any interest, and the accountholder pays amount as operational charge per year
• Banks may also allow withdrawals in excess of the balance of deposit, and are known as overdraft facility to its customers which is subject to previous agreement with the bank

c. Fixed Deposit Account

• Allow deposits or term for a specified long period of time to earn interest and high rates
• This period of deposit may range from 15 days to three years, and no withdrawal is allowed
• Depositors can encash the amount before its maturity upon request, and given lower interest than what was agreed upon
• Interest on fixed deposit account can be withdrawn at certain intervals of time, and the end of the period, the deposit can be withdrawn or renewed Banks grant loan on the security of fixed deposit receipt

d. Recurring Deposit Account

• Suitable for those who can save regularly and expect to earn a fair return on the deposits over a period of time
• When opening account, a person has to agree to deposit a fixed amount once a month for a certain period, then the total deposit along with the interest is payable on maturity
• The rate of interest allowed on the deposits higher than that on savings Bank, but lower than the rate allowed on a fixed deposit Account can be opened individually, or jointly with another, or by the guardian in the name of a minor

To Open a Savings Bank Account:

• To open a savings bank account, you have to decide what amount of money you would like to deposit initially. You may enquire and find out from the nearest bank what is the minimum amount to be deposited while opening a savings bank account
• You fill up a form giving then following information: Name, Occupation, Address, Signature
• The application also has to be filled up giving information: Name, address, account number, and signature of the person introducing the applicant
• Applicant has to put his/her specimen signatures on a card, along with his/her photograph and account number
• Bank issues a pass book and records its first deposit. All future deposits and withdrawals are entered in the Pass Book, and cheque books are issued on request.

Operating Savings Bank Account

• Follow the required procedure for deposits to be made in the account and for withdrawing money from the account

i. Deposit in the Account

• Each 'pay-in-slip' consists of two parts: right with 'foil' and left with 'counter-foil that are divided by perforation
• You fill in the deposit date, your name, account number, and the amount deposited. Besides you have to enter how many currency notes of different denominations
• You sign and present the pay-in-slip and hand over the amount of cash to the receiver
• The receiver will keep the foil of the pay-inslip while the left-hand part (counter-foil) will be rubber-stamped, signed by him, and returned to you

ii. Withdrawal from Deposit Account

• Banks use methods of withdrawal for people who wish to access their savings in the future: withdrawal form, cheque, and ATM card

a. Withdrawal Form

• Every bank has printed withdrawal forms to be used by account holders
• Mention with date, account number, amount to be withdrawn, and the signature of the account holder along with the pass book
• Withdrawal is recorded in the pass book, and a token is given for the amount and has to be presented at the cash payment counter for receiving amount

b. Cheque

• Account-holders can withdraw from accounts, which can be issued for payment to third parties
• When another person deposits the check to a bank, it will require the same procedure to be followed as that for withdrawal

c. ATM Card

• Banks issue ATM cards to its depositors for easy withdrawals from an ATM through debit in saving and current deposit
• You have to enter a PIN to access the ATM, deposit money in envelops, and then press deposit buttons
• Withdrawals can then be made by pressing or touching a withrawal button and mentioning the desired amount through the outlet

Teller Counters

• To facilitate quick transaction, banks provide teller counters to withdraw money from the deposit account where manual teller verify balance and signature to fulfill cheque from
• Automatic ATMs have preinstalled machines without needing anyone for verifying the signature, and operates 24 hours. PINs are required to operate

9.10 E-BANKING (ELECTRONIC BANKING)

• Automated delivery of traditional banking is done through interactive electronic communication channels
• E-banking gives financial institution customers ability to access transact, and get access to information through networks and the internet
• Computers are being used to record banking transactions, banking activity is carried on, electronic banking or e-banking

Automated Teller Machine

• Machine enables a customer to to withdraw, check balance, and transfer even closed banks
• ATMs are available everywhere convenient

Debit Card

A card allows customers to transfer funds, and purchase goods through debit charges

Credit Card

a card giving the person the option to borrow funds, charge interest for short-term, and have limits

Net Banking

• The Internet provides a secure way to transfer funds, do transactions with credit cards, and access bank accounts
• Customers are able to perform any routine transactions, such as accounts transfers, balance inquiries, and offers online loan/credit card applications

Phone Banking

• Customers are able to access accounts and get banking services by calling, getting info, make banking transactions, and getting credit
• A customer use mobile phones to send and receive messages from bank to do functions of phone banking