The concept of Banking Functions of a Bank Basic principles of banking Banker customer relationship Social responsibility of banks

Principles of Banking and Insurance Module 1

The concept of Banking

Section 5(b) of banking Regulation Act, 1949 The term banking means accepting for the purpose of lending or investment of deposits of money received from the public, repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise accepting deposit for trading or manufacturing is not covered here

deposits from public only. Nidhis and Societies that accept deposits from members do not qualify to be called banks

The term Bank was derived from the French word Banque Jews of Lombardy used to transact business sitting on bench Bank of England was the first bank to come up in the true sense of the word When it comes to India, it is Bank of Hindustan ( 1770) that was established to start with Under British rule, earliest institutions were trading and banking together doing

Presidency Banks Bank of Bengal, Bank of Bombay and bank of Madras came into being in the year 1809, 1840 and 1843 respectively.

In the year 1919, Imperial Bank was formed by way of merger of these three presidential banks 1881: Oudh Commercial Bank first bank of limited liability managed by Indians Between 1865 and 1895, Allahabad Bank and Punjab National Bank came into existence 1906 : Swadeshi Movement a number of Commercial Banks were established thanks to this movement 1913 1917: This period saw the banking crisis 1934: RBI Act was passed 1949: Banking Regulation Act was enacted 1.1.1949: RBI was nationalised 1955: Imperial bank was partially nationalised State Bank of India was carved out of Imperial Bank 1959: 7 subsidiaries of SBI were established Find out the latest position of SBI subsidiaries

1969: 14 major commercial Banks with deposits exceeding Rs 50 crore were nationalised ( 19.7.1969) 15.4.80: 6 more commercial Banks with total time and demand liability exceeding Rs 200 crore were nationalised 1993: New Bank of India was merged with Punjab National Bank
Incorporation of Banks as under Body Corporate constituted under a special statute Companied registered under Companies act 1956 or a Foreign Company ( Private Banks and Foreign Banks ) Co-operative societies registered under a Central or State enactment .

Banks are classified into 1. Public Sector Banks - includes nationalised Banks - Includes Regional Rural Banks 2. Banking Companies formed under section 3 of Companies Act, 1956. - Private Banks - Foreign Banks 3. Co-operative Banks - Primary Co-operative Banks - District Central Co-operative Banks - State Co-operative Banks
According to RBI classification it is 1. State Bank of India and Associates 2. Nationalised Banks 3. Foreign Banks 4. RRBs 5. Private Sector Banks

Co-Operative Banks

Co-operative banking movement started in India with the opening of Co-operative credit societies act, 1904. Cooperative banks were carved out of co-operative societies. The whole mechanism is based on Co-operative principles. Facilitating rural credit and promoting thrift and self-help spirit is the main agenda of co-operative movement in India Co-operative banking has two dimensions a) Agriculture b) Non-agriculture Agricultural Banks ( CA Bank model) - 3 layers 1. Primary co-operative Banks 2. District Co-operative Banks ( DCCB) 3. State Co-operative Banks ( SCB) Non-Agricultural Urban Co-operative Banks( UCBs), Employees Credit Co-operative Housing Co-operatives and so on name a few more

Functions of a Bank
Section 6 of the act lays down the principal functions of a bank. Subsidiary functions are divided into a) agency services b) general utility services

Agency services
Buying and selling stock exchange securities Executing standing instructions Collection of cheques, drafts, bills on behalf of customers Collection of rent and other receivables Offering remittance facilities Acting as trustees, executors and attorneys Trustee: is a person in whose care the control of an estate is entrusted generally by a deceased person under a will or by way a trust deed.

Where a person dies testate ( leaving a will), the person named to look after the property is called executor Where a person dies intestate( without a will), the person appointed is called administrator

General utility services Providing specialised to customers services Locker facilities Accepting valuables for safe custody Underwriting loans floated by governments Dealing in foreign exchange Serving as referees as to the financial standing, business reputation of customers Issuing letters of credit Issuing bank guarantees Issuing solvency certificates Government transactions Pension disbursements Merchant banking

Non fund based:

a)
b) a)

b)
c) d) e)

f)
g) h) i)

j)
k) l) m)

Bank guarantee Letter of credit Fee based services offered by banks: Credit card business Merchant banking activities FX services Treasury management services Insurance business Investment banking services Project counselling Technology tie ups Subsidiary services Rehabilitation of sick units Mergers and amalgamations Cash management services And many more ---

Basic principles of banking Principle of Custodianship Principle of secrecy Principle of disclosure Prudential principle Preservation of records Conforming to national objectives Principle of service Credit creation and multiplication Principle of equity Principle of distribution Principle of discipline and enforcement

Banker Customer Relationship Debtor Creditor relationship Trustee beneficiary relationship Bailor bailee relationship Agent principal relationship Lessor lessee relationship Indemnifier indemnified relationship Debtor creditor relationship When a customer deposits money, he becomes the creditor and the banker debtor. Where the banks grants credit, the position is exactly the opposite.

Trustee beneficiary relationship Where the customer keeps certain valuables or securities with the bank for safe keeping or deposit certain money for a specific purpose, the banker is not only the bailee but also a trustee. Bailor-bailee relationship When a customer deposits certain securities or offers collaterals for securing the loan, he is said to be the bailor and the bank is bailee. U/S 148 of Indian Contract Act, banker ( bailee) is liable to for any loss caused to the bailor due to his negligence. Finder of lost goods is also treated as bailee. Bailee has to return any increase in goods to the true owner/customer ( Section 164)

Agent-principal relationship: In discharging ancillary services such as remittance, collection of cheques, bills etc on behalf of the customers, banker acts as an agent.
Lessor and lessee relationship: When a banker provides safe deposit lockers to the customers, he assumes the position of a lessor and the customer is treated as lessee. Indemnifier and indemnified : When bank issues a bank guarantee in favour of a third party on behalf of his customer, he takes an indemnity from such customer which protects him from the loss that may be incurred by the banker by the act of issuing bank guarantee. In this case, the customer is the indemnifier and the bank is indemnified.

Social responsibility of banks

Service to all sections of the society Reaching the unreached To work towards social justice and economic liberalisation To remove regional imbalances Financial inclusion To deliver the benefits of socially desirable and government sponsored schemes To supplement the efforts of various government organisations and departments To keep an eye on undesirable and unscrupulpus elements To prevent money laundering activities

To formulate lending policies and programs in tune with government plans and priority To fall in line with RBIs ideas and aspirations in the matter of credit control To work towards the total banking development of the allotted districts as Lead Bank To extend all the benefits of debt waiver, subsidies and interest subvention To undertake survey, research as per government guidelines To disclose information to authorities concerned about any suspicious transactions To protect property, assets To undertake CSR activities To support the cause of youth, women and the oppressed