Aditya Institute Of Management

Studies And Research

BANKING & INSURANCE

PGDM 1st Year

Sem. 2

Akanksha L.P. Pathak

Roll No.: 19

Submitted To.: Prof. Jyotsana Haran

INDEX
Sr.
No.

Name Of The Topic

Pg. No.

Introduction BANK

Functions of BANK

Role of Banks

Organized & Unorganized Banking

11

 MEANING OF BANK.
The word "bank" is commonly regarded as derived from the
Italian word banco, a bench - the Jews in Lombardy having
benches in the market-place for the exchange of money and bills.
Benches were used as desks or exchange counters where they
used to make their transactions atop desks covered by green
tablecloths. When a banker failed, his bench was broken by the
populace; and from this circumstance we have our word
bankrupt.
The origin of western type commercial Banking in India dates
back to the 18th century. The story of banking starts from Bank of
Hindustan established in 1770 and it was first bank at Calcutta
under European management. It was liquidated in 1830-32. From
Bank of Hindustan in 1770, the evolution of banking in India can
be divided into three different periods as follows:
RESERVE BANK ACT 1938 PRIVATELY OWNED AND
REGULATED THE BANKING FUNCTIONS
1948 WENT PUBLIC WITH GOVERNMENTAL RULES AND
REGULATIONS
Phase I: Early phase of primitive Indian banks to
Nationalization of Banks in 1969
Phase II: From Nationalization of India banks in 1869 up to
advent of liberalization and banking reforms in 1991
Phase III: From Indian Financial and Banking Sector Reforms
1991 onward

 DEFINITION OF BANK.
A financial institution licensed as a receiver of deposits,
pay interest, clear checks, make loans, act as
an intermediary in financial transactions,
and provide other financial services to its customers.

Financial Intermediary

FUNCTIONS OF BANKS.:
Bank has various functions which it performs daily for the
betterment and ease of its customers. Functions of banks are
broadly classified into two groups .

PRIMARY
FUNCTIONS

SECONDAR
Y
FUNCTIONS

- Accepting Deposits
- Advancing of loans

- Overdraft Facility
- Discounting Bills of
Exchange
- Agency Functions
General Utility Functions

(A) PRIMARY FUNCTIONS:

1. Accepting Deposits:
It is the most important function of commercial banks.
They accept deposits in several forms according to requirements
of different sections of the society.
(i)

Current Account Deposits

(ii)

Fixed Deposits or Time Deposits

(iii)
2. Advancing of Loans:
The deposits received by banks are not allowed to remain idle. So,
after keeping certain cash reserves, the balance is given to needy
borrowers and interest is charged from them, which is the main
source of income for these banks.

(B) SECONDARY FUNCTIONS:

1. Overdraft Facility:

It refers to a facility in which a customer is allowed to overdraw

his current account upto an agreed limit. This facility is generally
given to respectable and reliable customers for a short period.
Customers have to pay interest to the bank on the amount
overdrawn by them.

2. Discounting Bills of Exchange:

It refers to a facility in which holder of a bill of exchange can get
the bill discounted with bank before the maturity. After deducting
the commission, bank pays the balance to the holder. On
maturity, bank gets its payment from the party which had
accepted the bill.
3. Agency Functions:
Commercial banks also perform certain agency functions for their
customers. For these services, banks charge some commission
from their clients.

i.

Transfer of Funds:

Banks provide the facility of economical and easy remittance of

funds from place-to-place with the help of instruments like
demand drafts, mail transfers, etc.

ii.

Collection and Payment of Various Items:

Commercial banks collect cheques, bills, interest, dividends,

subscriptions, rents and other periodical receipts on behalf of
their customers and also make payments of taxes, insurance
premium, etc. on standing instructions of their clients.
iii.

Trustee and Executor:

A bank keeps all documents jewelry and other valuables on behalf

of its customers in safe custody and returns them when customer
demands thus acting as a trustee.

iv.

Acts as an agent:

Bank performs various functions like buying and selling of

securities or collects cheques on behalf of its clients acting as an
agent for its customers.

4. General Utility Functions:

Commercial banks render some general utility services like:
(i) Locker Facility:
Commercial banks provide facility of safety vaults or lockers to
keep valuable articles of customers in safe custody.
(ii) Travellers Cheques:
7

Commercial banks issue travelers cheques to their customers to

avoid risk of taking cash during their journey.
(iii) Letter of Credit:
They also issue letters of credit to their customers to certify their
creditworthiness.
(iv) Underwriting Securities:
Commercial banks also undertake the task of underwriting
securities. As public has full faith in the creditworthiness of banks,
public do not hesitate in buying the securities underwritten by
banks.

 ROLE OF BANKS IN ECONOMIC DEVELOPMENT

1. Mobilising Saving for Capital Formation:
The commercial banks help in mobilising savings through
network of branch banking. People in developing countries have
low incomes but the banks induce them to save by introducing
variety of deposit schemes to suit the needs of individual
depositors. They also mobilise idle savings of the few rich. By
mobilising savings, the banks channelise them into productive
investments. Thus they help in the capital formation of a
developing country.
2. Financing Industry:
The commercial banks finance the industrial sector in a
number of ways. They provide short-term, medium-term and longterm loans to industry. In India they provide short-term loans.
In India, the commercial banks undertake short-term and
medium-term financing of small scale industries, and also provide
hire- purchase finance. Besides, they underwrite the shares and
debentures of large scale industries. Thus they not only provide
finance for industry but also help in developing the capital market
which is undeveloped in such countries.
3. Financing Trade:
The commercial banks help in financing both internal and
external trade. The banks provide loans to retailers and
wholesalers to stock goods in which they deal. They also help in
the movement of goods from one place to another by providing all
types of facilities such as discounting and accepting bills of
9

exchange, providing overdraft facilities, issuing drafts, etc.

Moreover, they finance both exports and imports of developing
countries by providing foreign exchange facilities to importers and
exporters of goods.
4. Financing Agriculture:
The commercial banks help the large agricultural sector in
developing countries in a number of ways. They provide loans to
traders in agricultural commodities. They open a network of
branches in rural areas to provide agricultural credit. They provide
finance directly to agriculturists for the marketing of their
produce, for the modernisation and mechanisation of their farms,
for providing irrigation facilities, for developing land, etc.
They also provide financial assistance for animal husbandry, dairy
farming, sheep breeding, poultry farming, pisciculture and
horticulture. The small and marginal farmers and landless
agricultural workers, artisans and petty shopkeepers in rural areas
are provided financial assistance through the regional rural banks
in India. These regional rural banks operate under a commercial
bank. Thus the commercial banks meet the credit requirements of
all types of rural people.
5. Financing Consumer Activities:
People in underdeveloped countries being poor and having
low incomes do not possess sufficient financial resources to buy
durable consumer goods. The commercial banks advance loans to
consumers for the purchase of such items as houses, scooters,
fans, refrigerators, etc. In this way, they also help in raising the
10

standard of living of the people in developing countries by

providing loans for consumptive activities.
6. Financing Employment Generating Activities:
The commercial banks finance employment generating
activities in developing countries. They provide loans for the
education of young persons studying in engineering, medical and
other vocational institutes of higher learning. They advance loans
to young entrepreneurs, medical and engineering graduates, and
other technically trained persons in establishing their own
business. Such loan facilities are being provided by a number of
commercial banks in India. Thus the banks not only help inhuman
capital formation but also in increasing entrepreneurial activities
in developing countries.
7. Help in Monetary Policy:
The commercial banks help the economic development of a
country by faithfully following the monetary policy of the central
bank. In fact, the central bank depends upon the commercial
banks for the success of its policy of monetary management in
keeping with requirements of a developing economy.
Thus the commercial banks contribute much to the growth of a
developing economy by granting loans to agriculture, trade and
industry, by helping in physical and human capital formation and
by following the monetary policy of the country.

11

Principle Of Intermediation:
Through the process of financial intermediation, certain assets or liabilities are transformed into
different assets or liabilities.[1] As such, financial intermediaries channel funds from people who have
extra money or surplus savings (savers) to those who do not have enough money to carry out a
desired activity (borrowers).[2]
A financial intermediary is typically an institution that facilitates the channeling of funds between
lenders and borrowers indirectly.s.[3] That is, savers (lenders) give funds to an intermediary institution
(such as a bank), and that institution gives those funds to spenders (borrowers). This may be in the
form of loans or mortgages.

Interest earned Interest Paid = Spread

Principle Of Liquidity:
The operations of receiving of deposits and lending these funds to
borrowers is done by bank simultaneously in a manner such that
the bank would be able to arrange for the funds demanded by its
depositors at any point of time. This is called as liquidity
management or asset liability management. This principle is
enforced by the regulatory requirements of the Reserve Bank Of
India (RBI). As per RBI every bank has to maintain deposits with
the RBI as cash reserve ratio(CRR).
Principle Of Profitability.:

DIFFERENCE BETWEEN ORGANISED AND

UNORGANISED BANKING SECTOR

Organized sector

Unorganized sector

They are prohibited on carrying

on any activity
Rates of interest are
comparatively lower.

Frequently combine trading with

banking activity
Usually charge very high rate of
interest and it also fluctuates
with the needs of borrowers.
12

Lots of paper work, procedures

and formalities
Money can be withdrawn only
through cheques , drafts,
orders, etc. During the working
hours and in bank premises.
They provide a number of
agency and general utility
services to customers.
Money has to be returned on
demand.
High end technology used for
many services. Usually all
operations are computerized.

Formalities and procedures for

borrowing are bare minimum.
No restriction as to mode of
demand, of time and place of
transaction.
Do not provide other agency/
general utility services.
Usually money has to be
returned after a fixed period of
time.
Hardly use any procedure or
technology in their work.

13

14