OVERVIEW OF INDIAN BANKING SYSTEM
EVOLUTION OF BANKING SECTOR
Phase I- Pre-Nationalisation Phase (prior to 1955)
Phase II- Era of Nationalisation and Consolidation (1955-1990)
Phase III- Introduction of Indian Financial & Banking Sector Reforms and Partial Liberalisation (1990-2004)
Phase IV- Period of Increased Liberalisation (2004 onwards)
Ø Sub phases 1) 1991-92 to 1997-1998 2) 1997-98 beyond
Ø Balance of payment problem
Narasimham committee I
There is no bar to new banks being set up in private sector.
No treatment between public & private sector sectors.
Asset reconstruction fund
Recover bad debts through tribunals
Branch licensing should be abolished
Narasimham committee II
Rehabitalization of weak banks
2 or 3 large indian banks should be given an international character.
Formulation of corporate strategy
Speed up of computerization &relationship banking
Review the recruitment procedure
Raghuram Rajan committee(committee on financial sector reforms-2009)
Macro economic framework and financial sector development
Broadening access of finance
Creating more efficient and liquid market
Creating a growth friendly & regulatory framework
Creating a robust infrastructure for credit.
Definition of Banking
According to the Indian Banking Companies Act , ―Banking Company is one which transacts the business of banking which means the accepting for the purpose of lending or investment of deposits money from the public repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise‖.
FUNCTIONS OF BANKS
The functions of a bank may broadly be divided into two parts.
Basic or primary functions.
Bank offers to deposit money in any of the following accounts:
Current or Demand Account(one where the amount can be withdrawn at any time by
Saving Account (helps in mobilization of the saving of low income people)
Fixed Deposit Account or Term Deposit Account:(which amounts are deposited for a certain fixed period of time. The deposits cannot be withdrawn before the expiry of this fixed period)
Foreign Currency Account(foreign currency saving account or foreign currency term deposit
Banks grant loan in any of the following forms:
Overdraft is a short-term loan granted by commercial banks to their account holders. Under this type of loan, the customers are allowed to draw more than what they have in their current account up to a certain limit. The excess amount overdrawn is called overdraft.
Cash credit is a very common form of loan granted by commercial banks to businessmen and industrial units against the security of goods. The loan granted under this head is credited to current account opened in the name of borrower. The borrower can withdraw money through cheques according to his requirement. The interest is charged on the amount actually withdrawn by the borrower.
Commercial banks grant loans for short and medium-term to individuals and traders against the security of movable and immovable property. The amount of loan is credited to the borrower's account. Interest is charged on the entire loan sanctioned.
General utility functions
The banks render important services as agent on behalf of their customers in return for a small commission. When banks act as agent, law of agency applies. The agency functions or services of bank are as follows:
Collection of Cheques:
Ø The commercial banks collect dividends, interest on investment, pension and rent of property due to the customers. When any income is collected by the bank, a credit voucher is sent to the customer for information.
Acts as trustee:
Ø The banks act as trustee to manage trust property as per instructions of property owners. Banks are required to follow the terms and conditions of trust deed.
Acts as an agent:
Ø Commercial bank sometimes acts as an agent on behalf of its customers at home or abroad in dealing with other banks or financial institutions.
Obeys standing instructions:
Ø Sometimes, customer may order his bank to do something on his behalf regarding the conduct of his account. This written order is called standing instruction. The bank being the agent of its customer obeys the standing instructions.
Acts as tax consultant:
Commercial bank acts as tax consultant to its client. The commercial bank prepares general sales tax return, income tax return, etc. Tiles the same with tax authorities.
General Utility Functions:
Provides lockers facilities:
Issue of traveler's cheque(customers for traveling in and outside the country.)
Foreign exchange:exchange of their home currency
Transfer of money:provide facilities for the transfer of money to any place within and outside the country
Finances foreign trade:accepting foreign bills of exchange.
Trade information:provide trade information and tender advice to its customers
Modaraba Company:The commercial banks act as Modaraba and leasing companies under the provisions of Modaraba Companies Ordinance, 1980.
Ø Commercial banks underwrite or purchase Participation Term Certificate (PTCs), Term Finance Certificates (TFCs) and Modaraba Certificates. This helps the companies to raise their capital.
Commercial banks answer reference letters regarding the financial standing and business reputation of customers. Banks provide this information with great care and utmost secrecy.
Commercial banks provide facilities for the collection of utility bills from general public on behalf of government bodies. This facilitates the public to pay utility bills in time.
Ø Commercial banks collect Zakat from their account holders and deposit the same into Central
Zakat Fund, according to Zakat and Usher ordinance - 1980.
Ø The commercial banks provide free Hajj sendees to the intending pilgrims. Banks receive Hajj applications. Banks also facilitate to form Hajj groups. Banks make necessary arrangements for the training of intending pilgrims,
Ø The commercial banks provide Qarz-e-Hasna to deserving patients for medical treatment and to students for higher studies within the country and abroad. The Qarz-e-Hasna is refund Ale in easy installments,
Electronic banking and E-banking:
Electronic banking is offering improved services to the customers as fellows:
Electronic transfer of money