Introduction to Banking

Introduction to Banking

• The banking system is a vital part of a country’s financial system, enabling the mobilization of deposits and disbursement of credit to different sectors of the economy.
• Banks act as intermediaries between savers and borrowers, taking deposits at a lower rate (deposit rate) and lending at a higher rate (lending rate).
• The difference between the deposit and lending rates is known as the ‘net interest spread’, which is the bank's income.

Definitions of a Bank

• A bank is a financial institution that manages money, paying it out on customer orders.
• Banks are institutions whose debts are generally accepted in settling other people’s debts.
• A bank is a financial intermediary that accepts deposits and grants loans.
• A bank is an establishment that deals in money and receives it on deposit.
• A bank is an intermediary financial institution that deals in loans and advances.

Characteristics of a Bank

• Dealing in Money: Banks handle the money of others, primarily deposits from customers.
• Individual/Firm/Company: A bank can be a person, a firm, or a company.
• Acceptance of Deposit: Banks accept money from the public.
• Giving Advances: Banks provide loans to individuals and businesses.
• Payment and Withdrawal: Banks facilitate easy payment and withdrawal of money using checks and drafts.
• Agency and Utility Services: Banks offer services like transfer of funds, collection of checks, and locker facilities.
• Profit and Service Orientation: Banks are focused on both profit-making and serving their customers.
• Ever-increasing: Banks continuously expand their functions, services, and activities.
• Connecting Link: Banks connect borrowers and lenders, collecting money from savers and lending it to those in need.
• Banking Business: A bank's primary core business should remain banking practices.
• Name Identity: Banks usually include the word "bank" in their name to clearly identify them as financial institutions.

Functions of Banks

Primary Functions

• Accepting Deposits:
  • Saving Deposits: Encourage savings with a low interest rate.
  • Fixed Deposits: Offer a fixed interest rate for a specified period.
  • Current Deposits: Allow for flexible deposits and withdrawals without interest.
  • Recurring Deposits: Encourage regular savings with a fixed deposit amount.
• Granting of Loans and Advances:
  • Overdraft: Allows exceeding account balances with a predetermined limit.
  • Cash Credits: Provides a credit limit for withdrawal against security.
  • Loans: Offer fixed-term loans for various purposes with interest payments.
  • Discounting of Bill of Exchange: A bank purchases bills of exchange at a discount, providing immediate cash.

Secondary Functions

• Agency Functions:
  • Transfer of Funds: Move funds from one account to another.
  • Collection of Checks: Collect checks on behalf of clients.
  • Periodic Payments: Make regular payments like salaries or pensions on behalf of clients.
  • Other Agency Functions: Act as trustees, executors, financial advisors, or representatives.

General Utility Functions

• Issue of Drafts, Letters of Credit, etc.: Provide instruments for transferring money or securing payments.
• Locker Facility: Offer secure lockers to store valuables.
• Underwriting of Shares: Participate in the issuance of new securities.
• Dealing in Foreign Exchange: Facilitate currency exchange and international financial services.
• Project Reports: Prepare financial reports on behalf of clients.
• Social Welfare Programs: Engage in community outreach and development initiatives.
• Other Utility Functions: Provide credit information, market intelligence, and travel-related services.

Structure of the Indian Banking System

• Reserve Bank of India (RBI): The central bank regulating India's entire banking system.
• Scheduled Banks: Listed in the Reserve Bank of India Act, 1934, eligible for loans from RBI and membership of a clearinghouse.
• Non-scheduled Banks: Not listed in the Act, not eligible for standard loans from RBI except for emergencies.

Types of Scheduled Banks

• Commercial Banks: Accept deposits and grant loans for profit.

  • Public Sector Banks: Majority ownership held by the government.
  • Private Sector Banks: Majority ownership held by private stakeholders.
  • Foreign Banks: Headquartered outside India but operating within the country.
  • Regional Rural Banks (RRBs): Focus on providing credit to agricultural and rural sectors.

• Cooperative Banks: Belong to members who are also customers, supporting agriculture, small industries, and self-employed individuals.

  • Urban Cooperative Banks (UCBs): Operate in urban and semi-urban areas.
  • Rural Cooperative Banks: Focus on rural economies and can be short-term or long-term.

• Development Banks: Provide long-term credit for capital-intensive projects with social benefits.

  • Industrial Finance Corporation of India (IFCI Ltd), Industrial Development Bank of India (IDBI), Export-Import Bank of India (EXIM), Small Industries Development Bank of India (SIDBI), National Bank for Agriculture and Rural Development (NABARD).

• The banking system's influence on a country's economic development includes supporting rural and suburban areas, financing small businesses, and promoting financial inclusion.

This quiz covers the fundamental concepts of banking, including the definition of banks, their roles as financial intermediaries, and the characteristics that define their operations. Participants will learn about how banks mobilize deposits, extend credit, and understand the importance of net interest spread. Test your knowledge on these essential topics in the banking system.