Evolution , Definition and functions of Banking

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)

1991-1992

^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

    Capital adequacy

    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.

    Secondary 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Current  or  Demand  Account(one  where  the  amount  can  be  withdrawn  at  any  time  by

the depositor.)

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 The deposits cannot be withdrawn before the expiry of this fixed period)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

account)

Advancing Loans:

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:

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.

Loans:

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.

Agency functions

    General utility functions

    Miscellaneous functions

    Agency 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.

Purchase PTCs:

^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.

Financial standing:

 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.

Zakat Collection:

^Ø Commercial banks collect Zakat from their account holders and deposit the same into Central

Zakat Fund, according to Zakat and Usher ordinance - 1980.

Hajj services:

^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,

Qarz-e-Hasna:

^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:

    ATM Cards

    Credit Cards

    Electronic transfer of money