Financial Literacy Unit 3 Banking PDF

Unit 3: Banking Learning Objective The objective of this unit is to introduce the basic concepts of Banking. This unit fo- cuses on: Understanding the evolution of banking Discussing various types of banks...

Unit 3: Banking Learning Objective The objective of this unit is to introduce the basic concepts of Banking. This unit fo- cuses on: Understanding the evolution of banking Discussing various types of banks and their services and products Understanding key banking operations Learning Outcomes: Location Learning Outcome Knowledge Performance Teaching and Evaluation Evaluation Training Method Classroom Understand the evo- Describe the Chart the evolu- Interactive Lec- lution of banking importance and tion of banking ture: Evolution of evolution of across history Banks banking Describe various Understand the Enlist different Interactive types of banks types of services types of banks Lecture: Various and products and the services types of banks offered by banks they offer Activity: Enlist the various types of banks in India 3.Banking Let us understand the concept of banking with the help of an example. Consider a situation where a person (lender) lends some money to another person (receiver) without a cash memo or similar evidence. After a while, the lender demands his money back, but the receiver fails to do so. The lender cannot approach the police or file a lawsuit against the receiver because of the lack of evidence. Consider a different situation where there is a specialised institution that performs the role of a lender. It keeps all due documentation and lends money on specified rate of interest. The bank further instructs the receiver to pay back the money within the stip- ulated time. Failure to do so would invite fines and other actions. This important institutional role is performed by banks. A bank is a financial system licensed by the governing authority to lend money to people in the form of loans and receive money from people in savings and deposits. Page 14 Central Board of Secondary Education 3.1 Evolution of Money We can see that a Barter-like exchange system has its limitations and only works when one has something to offer that the other person needs and vice versa. It may not always be the situation. The limitations of the Barter System led to the evolution of money. In ancient India, people used gold coins as a mode of currency. Similarly, different world regions have been using other precious/semi-precious products as a trade unit. For example, the ancient Aztecs used beans as a trade currency, and Norwegians used butter. Similarly, US colonists used tobacco leaves and animal hides as a form of currency. Gradually, however, as human civilisation progressed, coins and currency notes came into circulation. The development of currency has been representative of the evolu- tionary level of an economy across ages. Historians date the earliest known records of metal coins to the 5th or 6th century BC. These coins were in the shape of tools like hoes and billhook (tools used in farming). Ancient civilisations used electrum* to make coins. In ancient India, too, metal coins came into circulation around the 6th century BC. Pa- per currency is said to have been introduced in India by the Mughals in the year 1236 AD. However, the transition to paper currency is said to have occurred in China during the 10th century. *naturally occurring alloy of Gold and Silver Central Board of Secondary Education Page 15 Plastic cards in the form of credit and debit cards are replacing paper money for mak- ing transactions. In addition to that, banking transactions through the internet have been gaining popu- larity in recent years. It is known as net-banking. Net-banking involves the transfer of money electronically; hence the term electronic money came into existence. The latest form of money used for transactions utilising block-chain technology is called crypto-currency. Some examples of crypto-currency are bitcoin, ethereum and ripple. 3.2 Banks and Their Importance A bank works according to strict rules and serves many more essential functions to individuals and businesses. To explain in simple words, a bank is an institution where people deposit and withdraw funds. In this sense, a bank acts as a ‘vault’ for the safe- keeping of funds. On the other hand, people may need funds more than their savings to purchase high-value products such as cars, bikes etc. In such situations, banks also provide ‘loans’ to the ‘deposit holders’. Banks play an essential role in the development of our nation, such as: Banks help in economic development by providing loans to farmers, service mem- bers, business people, and organisations Banks provide people and businesses with the opportunity to convert their savings into investments Banks raise the standard of living by providing loans for consumer goods, homes, automobiles, etc. Page 16 Central Board of Secondary Education  Banks identify our country’s backward regions and help in their economic and so- cial development by providing them adequate funds at reasonable interest rates 3.3 Origins of Banking In ancient human history, banking started in the temples and palaces even before 2000 BC. People used to store precious stones, relics, jewels and valuable artefacts in places of worship and mausoleums in honour and respect of kings and religious deities. Ancient Greeks, too, developed a system of transferring money in the form of book entries. Modern banking in India started in the form of the Bank of Hindostan in 1770. Bank of Calcutta (formed in 1806 and later known as the Bank of Bengal), Bank of Bombay (formed in 1840) and Bank of Madras (formed in 1843) merged in 1921 to form Impe- rial Bank of India. After independence, the GoI and the RBI nationalised the Imperial Bank of India in 1955 and renamed it the State Bank of India (SBI). SBI is also the oldest surviving bank of India. Central Board of Secondary Education Page 17 State Bank of India branch in London, England Nationalised banks in the country include: 1. State Bank of India 2. Bank of India 3. Bank of Maharashtra 4. Canara Bank 5. Indian Overseas Bank 6. Punjab & Sind Bank 7. Punjab National Bank 8. UCO Bank 9. Bank of Baroda 10.Union Bank of India 11. Indian Bank 12.Central Bank of India (not to be confused with RBI) 3.4 Types of Banks Let us recall the different types of banks we learned in the previous standard. We cat- egorised them based on their ownership and the services they offer: Central Bank: A central bank is the most important institution in the financial system of any country. The Reserve Bank of India (RBI) plays the role of a central bank in our country. Commercial Banks: These banks include public sector banks owned by the govern- ment and also private banks. Commercial banks provide a direct interface to the peo- ple allowing them to open and manage accounts, to obtain loans and other financial services. For example, the State Bank of India. We classify commercial banks into four different types, namely: Public sector banks or the nationalised banks of India like SBI, Union Bank of India, etc. Foreign banks like National Australia Bank, American Express Banking Corpora- tion, etc. Private sector banks like HDFC, ICICI, Axis Bank, etc. Regional Rural Banks (RRBs) 3.5 Opening a Bank Account To open a bank account, applicants submit the following documents to the bank: Passport size photographs Identity proof Page 18 Central Board of Secondary Education  Address proof Opening amount Once the bank opens the account, it provides the account number and chequebook to the account holder. 3.6 Types of Bank Accounts Almost every commercial bank has more than one type of accounts. Some common types of accounts that we learned in the previous class are listed below: 3.6.1 Savings Account These are the accounts opened in banks with the critical purpose of teaching the habit of saving amongst people. Savings accounts allow maximum flexibility to deposit any amount of their liking, making it easy and convenient for people. This kind of account is popular with students, salaried individuals, and senior citizens. Savings accounts earn a nominal interest based on the period for which the account holder parks the funds. 3.6.2 Current Account Business owners open these accounts to meet their requirement for a higher number of cash deposits and withdrawals. The vital thing to note in the case of current ac- counts is that they do not earn interest. On the other hand, banks charge interest from account holders for an overdraft facility. When banks allow account holders to withdraw more than their account balance to meet their business requirements, it is known as an overdraft. Central Board of Secondary Education Page 19 3.6.3 Fixed Deposit This account type is ideal for depositors who wish to park their bank funds for an ex- tended period. The key benefit of fixed deposit is that it provides a substantially higher interest rate than savings accounts. 3.6.4 Recurring Deposit Very popular with students, recurring deposits are designed to encourage regular sav- ings amongst people. These deposits, too, earn interest higher than savings accounts. An example of a Recurring Deposit is when a depositor plans to deposit a fixed amount of Rs.1000 per month for 24 months. Upon the completion of 24 months, the depositor gets back the base amount of Rs. 24,000, along with the interest amount. Page 20 Central Board of Secondary Education 3.7 Cheque - An Instrument of Exchange Cheques have been the most popular instrument for money transfer for many de- cades. Today, more and more people are using online banking. However, cheques continue to remain at the core of the banking industry. Let us understand through a simple example of how cheques work. Let us suppose that Disha has Rs.25,000 in her bank account with Bank ABC. She wishes to pay Rs.5,000 to Arif using a cheque. 1. She issues a cheque of Rs.5,000 to Arif using Bank ABC’s cheque book 2. Arif deposits the cheque in his bank, say Bank XYZ 3. Bank XYZ sends the cheque to Bank ABC 4. Bank ABC then sends the amount of Rs.5000 to Bank XYZ after confirming the cheque details 5. Bank XYZ then deposits Rs.5000 in Arif’s account 6. Bank ABC reduces Rs.5000 from Disha’s account Each cheque contains some key elements, which include: Amount to pay in words as well as in numbers Name and signature of the person making the payment or the account holder Name of the person who will receive the payment The date on or after which the cheque is valid Central Board of Secondary Education Page 21 Summary A bank is an institution where people deposit and withdraw funds. It acts as a ‘vault’ for the safekeeping of funds. Banks also provide ‘loans’ to the ‘deposit holders’ In ancient India, people used gold coins as a mode of currency and metal coins came into circulation around the 6th century BC The development of currency has been representative of the evolutionary level of an economy across ages Banking transactions through the internet is known as net-banking Banks play an essential role in the development of our nation Modern banking in India started in the form of the Bank of Hindostan in 1770 After independence, the GoI and the RBI nationalised the Imperial Bank of India in 1955 and renamed it the State Bank of India (SBI). SBI is the oldest surviving bank of India The Reserve Bank of India (RBI) plays the role of a central bank in our country Commercial banks are classified into four different types, namely: o Public sector banks o Foreign banks o Private sector banks o Regional Rural Banks (RRBs) Banks offer Aadhaar card-based savings account opening Bank accounts are of the following types: o Savings account o Current account o Fixed deposit o Recurring deposit Today, more and more people are using online banking. However, cheques con- tinue to remain at the core of the banking industry Page 22 Central Board of Secondary Education Abbreviations US United States of America SBI State Bank of India RBI Reserve Bank of India RRBs Regional Rural Banks PAN Permanent Account Number (Issued by the Income Tax Department, PAN is necessary for filing income tax returns) OTP One Time Password Unit 3: Self-Test Questions Choose the correct option(s) 1. Which of the following is ideal for depositors who wish to park their funds for the long term? a. Recurring deposit b. Fixed deposit c. Current account 2. Which amongst the following is NOT a commercial bank? a. EXIM Bank b. Punjab National Bank c. State bank of India 3. This account allows maximum flexibility to deposit any amount, making it easy and convenient for people. a. Current Account b. Savings account c. Fixed deposit Match the following 1 Public sector banks A An instrument for money transfer 2 Cheque B Coins to paper currency 3 Recurring deposit C Owned by the government 4 Evolution D Regular savings amongst people Guess the words 1. Allowance to withdraw more than account balance (O/_/E/_/_/R/_/_/T) 2. For safekeeping of funds bank act as a (V/_/_/L/_) Central Board of Secondary Education Page 23