Overview of Banking Industry

This article provides an quick overview of banking and its functions. This article discusses the basic defintion of banking, why banking is under strict regulations and what are some of the contractual obligations between banks and its customers. Banking & Opportunities for IT Professionals: In modern times, banks play an important role in the global economies. During the recent times, increases in telecommunications and other financial technologies, have allowed banks to extend their reach all over the world, and there is no longer a need for customers to visit banks branches for every transaction, as most of the transactions can happen online. The growth in cross-border activities has also increased the demand for banks that can provide various services across borders to different nationalities. Despite these advances in cross-border activities, the banking industry is nowhere near as globalized as some other industries. There exists huge growth potential for IT professionals to work on banking domain as it will gear itself for more and more growth and automation in the coming years. There is no doubt that Technology is going to be catalyst in that growth, creating huge opportunities for professionals with good understanding of banking domain. Banking Defined: A bank is a financial institution that provides banking and other financial services to their customers. A bank is generally understood as an institution which provides fundamental banking services such as accepting deposits and providing loans. There are also non- banking institutions that provide certain banking services without meeting the legal definition of a bank. Banks are a subset of the financial services industry. Need for Banking:

Banks are large and complex organizations. Their clients range from individuals and institutions, all the way up to the governments and central banks of entire countries. The Banking sector offers several facilities to their customers including safeguarding their money and valuables and providing them with various types of credit loans to meet their various needs like home loans, consumer loans, personal loans etc. Banks also provide additional services like credit, and payment services, such as checking accounts, money orders, and cashier's cheques. The banks also offer investment and insurance products. As a variety of models for cooperation and integration among finance industries have emerged, some of the traditional distinctions between banks, insurance companies, and securities firms are fast diminishing. In spite of all these developments, banks continue to maintain and perform their primary roleaccepting deposits and lending funds from these deposits. Banking is an important undertaking. The movement of capital handled by banks allows economies to grow and prosper. Businesses and governments need money to operate, and banks act as intermediaries between the suppliers of funds and users of funds. Functions of the Bank:

Bank provides various services and offer many products. The following discussion explains various functions of the bank:

Provide security to the savings of customers by safeguarding it and offering interest on the deposits kept with it.

Control the supply of money and credit and arrange funds to the parties who need them by borrowing from parties who have surplus.

Encourage public confidence in the working of the financial system Increase savings speedily and efficiently. Avoid focus of financial powers in the hands of a few individuals and institutions. Set equal norms and conditions to all types of customers Banking Regulations: Banks operating in most of the countries are exposed to various stringent regulations. Most governments enforce rules and procedures to govern their operations and service offerings, and

the manner in which they grow and expand their facilities to better serve the public. A banker works within the financial system to provide loans, accept deposits, and provide other services to their customers. They must do so within a climate of extensive regulation, designed primarily to protect the public interests. The main reasons why the banks are heavily regulated are as follows:

To protect the safety of the public's savings. To control the supply of money and credit in order to achieve a nation's broad economic goal. To ensure equal opportunity and fairness in the public's access to credit and other vital financial services.

To promote public confidence in the financial system, so that savings are made speedily and efficiently.

To avoid concentrations of financial power in the hands of a few individuals and institutions. Provide the Government with credit, tax revenues and other services. To help sectors of the economy that they have special credit needs for example Housing, small business and agricultural loans etc. Law of banking: Banking law is based on a contractual agreement between the bank and customer. The customer is any entity for which the bank agrees to conduct an account or business. The law implies rights and obligations into this relationship as follows:

The bank account balance is the financial position between the bank and the customer: when the account is in credit, the bank owes the balance to the customer; when the account is overdrawn, the customer owes the balance to the bank.

The bank agrees to pay the customer's cheques up to the amount standing to the credit of the customer's account, plus any agreed overdraft limit.

The bank may not pay from the customer's account without a mandate from the customer, example cheques drawn by the customer.

The bank agrees to promptly collect the cheques deposited to the customer's account as the customer's agent, and to credit the proceeds to the customer's account.

The bank has a right to combine the customer's accounts, since each account is just an aspect of the same credit relationship.

The bank has a lien on cheques deposited to the customer's account, to the extent that the customer is indebted to the bank. The bank must not disclose details of transactions through the customer's accountunless the customer consents, there is a public duty to disclose, the bank's interests require it, or the law demands it.

The bank must not close a customer's account without reasonable notice, since cheques are outstanding in the ordinary course of business for several days. These implied contractual terms may be modified by express agreement between the customer and the bank. The statutes and regulations in force within a particular jurisdiction may also modify the above terms and/or create new rights, obligations or limitations relevant to the bankcustomer relationship. Type of Banks: Different Types of Banks & their Functions

The focus of banking is varied, the needs diverse and methods different. Thus, we need distinctive kinds of banks to cater to the above-mentioned complexities. This article discusses the broad classification of banks and explains each type of banks with their distinctions. The focus of banking is varied, the needs diverse and methods different. Thus, we need distinctive kinds of banks to cater to the above-mentioned complexities. Deposit-taking institutions take the form of commercial banks, which accept deposits and make commercial, real estate, and other loans. There are also mutual savings banks, which accept deposits and make mortgage and other types of loans. Another type is credit unions, which are cooperative organizations that issue share certificates and make member (consumer) and other loans. The banking industry can be divided into following sectors, based on the clientele served and products and services offered: 1. Retail Banks

2. Commercial banks 3. Cooperative banks 4. Investment Banks 5. Specialized banks 6. Central banks Retail Banks: Retail banks provide basic banking services to individual consumers. Examples include savings banks, savings and loan associations, and recurring and fixed deposits. Products and services include safe deposit boxes, checking and savings accounting, certificates of deposit (CDs), mortgages, personal, consumer and car loans. Commercial Banks: Banking means accepting deposits of money from the public for the purpose of lending or investment. Commercial Banks provide financial services to businesses, including credit and debit cards, bank accounts, deposits and loans, and secured and unsecured loans. Due to deregulation, commercial banks are also competing more with investment banks in money market operations, bond underwriting, and financial advisory work. Commercial banks in modern capitalist societies act as financial intermediaries, raising funds from depositors and lending the same funds to borrowers. The depositors claims against the bank, their deposits, are liquid, meaning banks are expected to redeem deposits on demand, instantly. Banks claims against their borrowers are much less liquid, giving borrowers a much longer span of time to repay money owed banks. Because a bank cannot immediately reclaim money lent to borrowers, it may face bankruptcy if all its depositors show up on a given day to withdraw all their money. There are two types of commercial banks, public sector and private sector banks. Public Sector Banks: Public sectors banks are those in which the government has a major stake and they usually need to emphasize on social objectives than on profitability.

Private sector banks: Private sector banks are owned, managed and controlled by private promoters and they are free to operate as per market forces. Investment Banks: An investment bank is a financial institution that assists individuals, corporations and governments in raising capital by underwriting and/or acting as the client's agent in the issuance of securities. An investment bank may also assist companies involved in mergers and acquisitions, and provide ancillary services such as market making, trading of derivatives, fixed income instruments, foreign exchange, commodities, and equity securities. Investment banks aid companies in acquiring funds and they provide advice for a wide range of transactions. These banks also offer financial consulting services to companies and give advice on mergers and acquisitions and management of public assets. Cooperative Banks: Cooperative Banks are governed by the provisions of State Cooperative Societies Act and meant essentially for providing cheap credit to their members. It is an important source of rural credit i.e., agricultural financing in India. Specialized Banks: Specialized banks are foreign exchange banks, industrial banks, development banks, exportimport banks catering to specific needs of these unique activities. These banks provide financial aid to industries, heavy turnkey projects and foreign trade. Central Banks: Central banks are bankers banks, and these banks trace their history from the Bank of England. They guarantee stable monetary and financial policy from country to country and play an important role in the economy of the country. Typical functions include implementing monetary policy, managing foreign exchange and gold reserves, making decisions regarding official

interest rates, acting as banker to the government and other banks, and regulating and supervising the banking industry. These banks buy government debt, have a monopoly on the issuance of paper money, and often act as a lender of last resort to commercial banks. The term bank nowadays refers to these commercial banks. The Central bank of any country supervises controls and regulates the activities of all the commercial banks of that country. It also acts as a government banker. It controls and coordinates currency and credit policies of any country. The Reserve Bank of India is the central bank of India. Banking Sector & Its Segments

Banking sector has witnessed enormous growth in the past decades. The banks have transformed themselves from traditional deposit and borrowing institutes to large organizations offering a variety of services. Discussion about various classifications of banks. The banking industry can be divided into two categories commercial banking and investment banking. Commercial Banking: This category represents consumer and business banking and includes commercial and foreign banks, savings and loan associations, credit unions, thrifts, and other savings banks. Commercial banks in modern capitalist societies act as financial intermediaries, raising funds from depositors and lending the same funds to borrowers. The depositors claims against the bank, their deposits, are liquid, meaning banks are expected to redeem deposits on demand, instantly. Banks claims against their borrowers are much less liquid, giving borrowers a much longer span of time to repay money owed banks. Because a bank cannot immediately reclaim money lent to borrowers, it may face bankruptcy if all its depositors show up on a given day to withdraw all their money.

Products and services include consumer and commercial deposits, consumer loans, mortgage and real estate loans, overseas operations, investment in high-grade securities, and commercial and industrial loans. Investment Banking: The products and services of this category include managing portfolios of financial assets, trading in securities, fixed income, commodity and currency, corporate advisory services for mergers and acquisitions, corporate finance, and debt and equity underwriting. Trading activities include trading both on behalf of clients or on the banks own account. Other Classifications: Banking products can be further classified as Retail Banking, Corporate Banking and Risk and Capital Management. In modern world banks perform and manage all the following functions and different classifications exist based on the need:

Retail Banking Corporate Banking Banking Operations Risk Management Asset Management Wealth Management Treasury Management Cards Issuance and Management Trading Intermediary acting as Depository Participant, Registry, Exchanges, Trading or Broker Dealer Banking Functions: The banking industry is growing rapidly. It's estimated that the assets of the 1,000 largest banks are worth almost $100 trillion USD. With the growth in the industry banks manages a diverse portfolio of functions. Apart from the segments discussed above banks also need to manage following functions and can also be classified based on functions:

Banking Technology Internal and External Reconciliations Internal and External Clearing Surveillance Human Resources Finance Legal and Compliance Sales and Trading Transaction Banking Banking sector in India has witnessed unparalled growth in the last decade.

Banking Operations

The banking industry caters to a diverse clientele, which includes, individual customers, small businesses, farmers, corporates and corporations, banks, governments, institutional investors, non profit organizations and international clients. Learn about the banking products and services for these customers. Let us try to understand what is the scale of banking in modern globalized world? Two major components of banking are Deposits and Loans. The banking industry caters to a diverse clientele, which includes:

Individual Customers Small Businesses Farmers Corporates and Corporations Banks Governments Institutional Investors Non Profit Organizations International Clients Individual Customers: First are Individuals like you and me. We earn money and spend money. We keep our surplus with banks and take loans from banks when we need money. Bank provides various services and products for this sector including savings account, fixed and recurring deposits, car loans, home loans, personal loans, credit and debit cards and salary disbursement accounts. Small Businesses:

Small business houses and traders need banking services to manage their day to day operations. Banking Industry offer various products tailored to the specific needs of small business men and traders. Some examples are cash credit accounts, current accounts, pay orders, demand draft, payable at cash cheque books, credit and debit card, loans for fixed assets and machinery etc. Farmers: Banking plays a very important role for farmers. Apart from offering products which are available to individual customers, it also offers many products and services specifically tailored for agriculturists and farmers. Banking sector plays an important role in agriculture based economies like India. They are one of the preferred mediums for governments to disburse various subsidies and concessional loans for farmers. Banks finance loans to buy equipment for farmers, provide financial planning and investment advice through Agriculture Banking Specialists, provide crop loans and production or season based loan products. Corporates & Corporations Banking industry is very important for Corporate or institutional clients. Companies generally have huge surpluses of money or need money to invest. Banks help them keep their surplus money or provide them with funds when they are in need of it. Funded Products provide short and medium term funding facilities to overcome challenges and complexities faced by corporations in managing cash flows. Banking channels provide finance to manage working capital needs of businesses. Treasury Products help to manage and mitigate business risks by providing money market and foreign exchange facilities. Foreign Exchange products deal with money market and various investment products help organizations achieve their financial goals. Some examples of investment products are term deposit and mutual funds. They may include a range of debt and fixed income products to suit the dynamic and varied needs of customers across segments. Banks:

Banks make lot of transactions with other banks. Many countries have Central Banks that are owned and managed by Governments. Banks borrow and lend money to each other. They get into consortium advances where two or more banks join together to offer credit to a large borrower. They enter into various agreements with each other to provide services in the regions where they dont have branches. Governments: Businesses and governments cannot be completely self-sufficient when it comes to availability of funds they need. They need money to operate, and banks act as intermediaries between the suppliers of funds and users of funds. Over the period of time banking has transformed itself into an important and powerful undertaking. Today the movement of capital handled by banks allows economies to grow and prosper. They maintain the delicate balance between the supply and demand of money by controlling borrowing and lending interest rates. Institutional Investors: Institutional investors are organizations which pool large sums of money and invest those sums in securities, real property and other investment assets. They can also include operating companies which decide to invest their profits to some degree in these types of assets. Types of typical investors include banks, insurance companies, retirement or pension funds, hedge funds, investment advisors and mutual funds. Their role in the economy is to act as highly specialized investors on behalf of others. Many banks act as institutional investors and most of them provide wide range of services to such investment bodies. Wide range of services are provided under this umbrella and may include assessment of investment needs, evaluation of asset structure and the liability-management requirements, cashflow analysis, development of investment policy, portfolio-construction, custody services, portfolio rebalancing, fundraising and philanthropic services. Non Profit Organizations:

A nonprofit organization are organizations pursuing a special cause, generally philanthropic in nature, and which uses surplus revenues to achieve its goals rather than distributing them as profit or dividends. Some NPOs may also be a charity or a service organization. Banks serve not-for-profit customers in variety of ways and generally have specialized products and services for such organizations. Most common service is the collect membership and other fees on behalf of them at various locations. Many banks offer Not-For-Profit Accounts which offers convenience of current account and also collected balances accumulated in the account earn interest like a saving back account. Many banks provide these banking services to nonprofit organizations at concessional or nominal cost. Specialized banking products could be available for organizations like churches, executors and administrators and trustees. International Clients: Banks offer financial services, such as payment accounts and lending opportunities, to foreign clients. These foreign clients can be individuals and companies, though every international bank has its own policies, most of them offer various products and services to cater to the needs of their international clientele. Banking products for this sector includes offshore banking, savings, investments, and mortgages clubbed with a broad range of FX services including forward and spot transactions. International clients generally require offshore banking facilities to secure their money outside their country of residence or to facilitate the business activities in another country. Many banks offer accounts in all major currencies and that helps international clients protect their money against local and international volatile economic and political environments. Banking channels facilitate easier trading across international borders and provide electronic banking with access to SWIFT. History of Banking

The banking industry has evolved from barter system and gift economies of earlier times to modern globalized and technology savy internet and e-banking. A overview of history of banking detailing the major events of banking industry. Origin of the term Bank: The term bank apparently owes its origin to the bank or bench used by the moneychangers during the middle ages. Historically, some banks were called banks of deposit, and mainly held deposits of foreign and domestic currencies and arranged payment in foreign trade transactions. Other banks created deposits that acted as a circulating medium of money in a society. One of the earliest banks in this category, the Bank of Venice, was formed when a group of the governments creditors combined and began using government debt as a means of payment in trade. Banking in the modern sense of the word can be traced to medieval and early Renaissance Italy, to the rich cities in the north like Florence, Venice and Genoa. The word bank was borrowed in Middle English from Middle French banque, from Old Italian banca, from Old High German banc, bank "bench, counter". Benches were used as desks or exchange counters during the Renaissance by Florentine bankers, who used to make their transactions atop desks covered by green tablecloths. The Beginning of Banking Industry: The History of Banking began at about 2000BC of the ancient world when merchants made grain loans to farmers and traders started carrying goods between cities within the areas of Assyria and Babylonia. The Code of Hammurabi, dating back to about 1772 BC, is one of the oldest deciphered writings of significant length in the world that deals with matters of contract and set the terms of a transaction. This code also included standardized procedures for handling loans, interest, and guarantees.

Later on, in ancient Greece and during the Roman Empire, lenders based in temples made loans and started accepting of deposits. Banking activities in Greece are more varied and sophisticated than in any previous society. They took deposits, made loans, changed money from one currency to another and tested coins for weight and purity. They even engaged in book transactions. Moneylenders can be found who will accept payment in one Greek city and arrange for credit in another, avoiding the need for the customer to transport or transfer large numbers of coins. Banking, in the modern sense of the word, can be traced to medieval and early Renaissance Italy, to the rich cities in the north such as Florence, Venice and Genoa. The development of banking spread through Europe and a number of important innovations took place in Amsterdam during the Dutch Republic in the 16th century and in London in the 17th century. Some of the earlier systems that facilitated trading/exchange of goods were barter system and gift economies. Barter System: Barter system is an age-old method that was adopted by people to exchange their services and goods. This system was used for centuries, before the invention of money. People used to exchange the goods or services for other goods or services in return. The advantage of bartering is that it does not involve money. You can buy an item in exchange for some other thing you currently have, but don't want. The barter system was one of the earliest forms of trading. It facilitated exchange of goods and services, as money was not invented in those times. Barter system has been in use throughout the world for centuries. The invention of money did not result in the end of bartering services. Gift Economy: A gift economy (or gift culture) is a society where valuable goods and services are regularly given without any explicit agreement for immediate or future rewards. The gifts are exchanged as per the prevailing informal customs, rather than an explicit exchange of goods or services for money or some other commodity. Gift economies were prevalent before the advent of market economies, but gradually disappeared as societies became more complex. Contrary to popular conception, there is no evidence that societies relied primarily on barter before using money for

trade, Instead, non-monetary societies operated largely along the principles of gift economics and debt. When barter did in fact occur, it was usually between complete strangers. Banking in 20th Century: During the 20th century, developments in telecommunications and computing resulting in major changes to the way banks operated and allowed them to dramatically increase in size and geographic spread. The Late-2000s financial crisis saw significant number of bank failures, including some of the world's largest banks. Following paragraph provides a snapshot of some developments in the banking industry over the last century: 1930s-1960s The Great Depression: During the Crash of 1929 preceding the Great Depression, banking and brokerage firms were operating with margin requirements of mere ~10%. It meant that the brokerage firms would lend $9 for every $1 an investor had deposited. When the market fell, brokers called in these loans, which could not be paid back. Banks began to fail as debtors defaulted on debt and depositors attempted to withdraw their deposits en masse, triggering multiple bank runs. Government guarantees and Federal Reserve banking regulations to prevent such panics were ineffective or not used. Bank failures led to the loss of billions of dollars in assets. After the panic of 1929, and during the first 10 months of 1930, 744 US banks failed and in all, over 9,000 banks failed during the 1930s. The depression is said to be one of the factors leading to World War II and post-war recovery period saw governments taking on a more active and larger role in banking, leading to increased regulation. In response to this many countries significantly increased financial regulation and established regulatory agencies to oversee banking operations and during the post Second World War period two organizations were created: The International Monetary Fund (IMF) and the World Bank. 1970s-2000s - Deregulation & Globalization: During the 1970s, there was a number of small stock market crashes tied to the regulations put in place after the Great Depression. These crashes led to the deregulation of banking restrictions and privatization of government-owned financial institutions. Global banking and capital market

services proliferated during the 1980s after deregulation of financial markets in a number of countries. The 1986 'Big Bang' in London allowing banks to access capital markets in new ways, which led to significant changes to the way banks operated and accessed capital. This period saw a significant internationalization of financial markets. American corporations and banks started seeking investment opportunities abroad, prompting the development in the U.S. of mutual funds specializing in trading of foreign stock markets. Growing internationalization changed the competitive landscape, as now many banks would function as much as possible as a one-stop supplier of both retail and wholesale financial services. Financial services continued to grow through the 1980s and 1990s as a result of a great increase in demand from companies, governments, and financial institutions. Beginning of 21st Century - The Decade of Internet Banking: The early 2000s were marked by consolidation of existing banks and entrance into the market of other financial intermediaries: non-bank financial institution. Large corporate players ventured into the financial service community, offering competition to established banks. The main services offered included insurances, pension, mutual, money market and hedge funds, loans and credits and securities. The process of financial innovation advanced enormously in the first decade of the 21 century, and banks explored other profitable financial instruments, diversifying banks' business and this had a positive impact on the economic wellness of the banking industry. This decade marked the beginning of the era in which the distinction between different financial institutions, banking and non-banking is gradually vanishing. Technological advances during the decade shifted the way banks operate from traditional branch banking to internet and e-banking. Late-2000s Financial Crisis: Subprime mortgage lending to borrowers with poor credit led to a financial crisis in 2007. The crisis originated in the United States, but financial institutions around the world were affected as banking industry was truly globalized at that point. Many institutions failed worldwide forcing central banks to take substantial recovery measures to stabilize the banking system.

The Late-2000s financial crisis caused significant stress on banks around the world. The failure of a large number of major banks resulted in government bail-outs. The global financial crisis forced governments around the world to re-evaluate their financial regulations.