Lesson 15

B a n k i n g
While walking in the streets oI any town or city you might have seen some signboards on buildingswith names-Canara Bank, Punjab
National Bank, State Bank oI India, United Commercial Bank,etc. What do these names stand Ior? Did you ever try to
know about them? II you enter any such building you will Iind some kind oI a business oIIice. You will see some employees
sitting behindcounters dealing with visitors standing in Iront oI them. You will Iind that some are depositingmoney
at one counter while some are receiving money at another counter. Behind the counters inthe oIIice you will
see tables and chairs occupied by oIIicers. On one side oI the oIIice you willalso see a chamber (small partitioned room)
where the manager is sitting with papers on his table.This is the oIIice oI a Bank`.Let us know in detail about banks and
their activities.
1 5 . 1 Ob j e c t i v e s
AIter studying this lesson, you will be able to:

state the meaning oI bank`;

explain the role oI banking`;

identiIy the diIIerent types oI banks; and

describe the Iunctions oI a commercial bank.
1 5 . 2 Me a ni ng o f Ba nk
You know people earn money to meet their day-to-day expenses on Iood, clothing, education oI children, housing,
etc. They also need money to meet Iuture expenses on marriage, higher education oI children, house building and other social
Iunctions. These are heavy expenses, which can bemet iI some money is saved out oI the present income.
Saving oI money is also necessary Ior oldage and ill health when it may not be possible Ior people to work and
earn their living.The necessity oI saving money was Ielt by people even in olden days. They used to hoard
moneyin their homes. With this practice, savings were available Ior use whenever needed, but it
alsoinvolved the risk oI loss by theIt, robbery and other accidents. Thus, people were in need oI
a place where money could be saved saIely and would be available when required.
Banks aresuch places where people can deposit their savings with the assurance that they will
be able towithdraw money Irom the deposits whenever required. People who wish to borrow
money Ior business and other purposes can also get loans Irom the banks at reasonable rate oI
interest.Bank is a lawIul organisation, which accepts deposits that can be withdrawn
ondemand. It also lends money to individuals and business houses that need it.Banks also render many other
useIul services like collection oI bills, payment oI Ioreign bills,saIe-keeping oI jewellery and other valuable
items, certiIying the credit-worthiness oI business,and so on.Banks accept deposits Irom the general public as
well as Irom the business community. Any onewho saves money Ior Iuture can deposit his savings in a bank.
Businessmen have income Iromsales out oI which they have to make payment Ior expenses. They can keep
their earnings Iromsales saIely deposited in banks to meet their expenses Iromtime to time. Banks give two assurancesto the
depositors a . S a I e t y o I d e p o s i t , a n d b. Wi t hdrawal oI depos i t ,
whenever neededOn deposits, banks give interest, which adds to the original
amount oI deposit. It is a greatincentive to the depositor. It promotes saving habits among the public.
On the basis oI deposits banks also grant loans and advances to Iarmers, traders and businessmen Ior productive
purposes.Thereby banks contribute to the economic development oI the country and well being oI
the people in general. Banks also charge interest on loans. The rate oI interest is generally higher thanthe rate oI
interest allowed on deposits. Banks also charge Iees Ior the various other services,which they
render to the business community and public in general. Interest received on loansand Iees
charged Ior services which exceed the interest allowed on deposits are the main sourcesoI income Ior banks Irom
which they meet their administrative expenses.The activities carried on by banks are called banking
activity. Banking` as an activity involvesacceptance oI deposits and lending or investment oI money.
It Iacilitates business activities by providing money and certain services that help in exchange oI
goods and services. ThereIore, banking is an important auxiliary to trade. It not only
provides money Ior the production oI goods and services but also Iacilitates their exchange between
the buyer and seller.You may be aware that there are laws which regulate the banking
activities in our country.Depositing money in banks and borrowing Irom banks are legal
transactions. Banks are alsounder the control oI government. Hence they enjoy the
trust and conIidence oI people. Also banks depend a great deal on public conIidence. Without public conIidence
banks cannot survive.
15.3Distinction between banks and moneylenders
You may be thinking that a bank is like a moneylender who provides Iunds to borrowers
andcharges interest on the loan. But it is not so. A bank is quite diIIerent Irom a moneylender.
A bank perIorms two main Iunctions. Firstly, it accepts deposits, and on that basis it lends money.The
moneylenders, on the other hand, advance money out oI their own private wealth and usuallydo not accept deposits Irom
others. The Iollowing table shows the distinction between a bank and moneylender.
B a s i s B a
n k s M o n
e y l e n d e
r s
1 . E n t i t y B a n k a r e o r g a n i s e d i n s t i t u t
i o n s . M o n e y l e n d e r s a r e i n d i v i d u a l s .
2 . A c t i v i t y B a n k i n g a c t
i v i t i e s A c t i v i t i e s o I m
o n e y l e n d e r i n c l u d e a c
c e p t a n c e m a y n o t i n c l
u d e o I d e p o s i t s a s w e l l a s a
c c e p t a n c e o I d e p o s i t s . lending
oI money.3 . C l i e n t s B a n k s m e
e t t h e n e e d s M o n e y l e
n d e r s m e e t o I p e o p l
e i n g e n e r a l t h e n e
e d s a n d t h e b u s i n e s s o
I a g r i c u l t u r i s t s a n d c
o m m u n i t y i n p a r t i c u l a r . p o o r
p e o p l e . 4 . S e c u r i t y B a n k s a c
c e p t t a n g i b l e M o n e y l e n d e
r s g e n e r a l l y a n d p e r s o n a l s
e c u r i t y a c c e p t g o l d , j e w e l l e
r y a g a i n s t l o a n s . o
r l a n d a s s e c u r i
t y Ior giving
loan.5 . P r o c e s s o I T h
e p r o c e s s o I T h e
p r o c e s s o I r e c
o v e r y o I r e c o v
e r y i s r e c o v e r
y i s l o a n s . I l
e x i b l e . r i g i
d a n d s t r i c
t . 6 . I n t e r e s t R a t e I n t
e r e s t c h a r g e d b y R a t e
o I I n t e r e s t b a n k s o n l
o a n i s i s d e c i d e d b y t h e
m o n e y l e n d e r g o v e r n e d
b y R B I . a n d i s n o r m a l l y
v e r y h i g h .
1 5 . 4 Ro l e o f Ba n ki ng
Banks provide Iunds Ior business as well as personal needs oI individuals. They play a signiIicantrole in the economy oI a
nation. Let us know about the role oI banking.

It encourages savings habit amongst people and thereby makes Iunds available Ior productiveuse.

It acts as an intermediary between people having surplus money and those requiring moneyIor various business
activities.

It Iacilitates business transactions through receipts and payments by cheques instead oI currency.
It provides loans and advances to businessmen Ior short term and long-term purposes.

It also Iacilitates import export transactions.

It helps in national development by providing credit to Iarmers, small-scale industries andselI-employed people
as well as to large business houses which lead to balanced economicdevelopment in the country.

It helps in raising the standard oI living oI people in general by providing loans Ior purchaseoI consumer
durable goods, houses, automobiles, etc.
ntext Questions 15.1
Fill in the blanks with suitable word (s):(a)A bank accepts deposits Irom people
and money to those who need it Ior various purposes.(b)Banks act as
between people having surplus money and those borrowing
money.(c)Banking Iacilitates business activities and is considered as an
important auxiliary to .(d)Banks Iacilitate payment through
instead oI currency.(e)A advances money out oI his
own private wealth and generally does notaccept deposits Irom
others.

15. 5Types of Banks
There are various types oI banks which operate in our country to meet the Iinancial requirementsoI diIIerent
categories oI people engaged in agriculture, business, proIession, etc. On the basis oI Iunctions, the banking institutions in
India may be divided into the Iollowing types:Types oI
BanksC e n t r a l B a n k D e v e
l o p m e n t B a n k s S p e c i
a l i s e d B a n k s ( R
B I , i n
I n d i a
) ( E X I M
B a n k SIDBI
,
NABARD)C o m m e r c i a l B a n
k s C o -
o p e r a t i v e B a n k s ( i
) P u b l i c S e c t o r B a n k s (
i ) P r i m a r y C r e d i t S o c i
e t i e s ( i i ) P r i v a t e S e c t o r
B a n k s ( i i ) C e n t r a l C o -
o p e r a t i v e B a n k s ( i i i ) F o
r e i g n B a n k s ( i i i ) S t a
t e C o -
o p e r a t i v e B a n k s Now let us learn
about each oI these banks in detail.

Banking
7
a) Central Bank
A bank which is entrusted with the Iunctions oI guiding and regulating the banking system oI acountry is
known as its Central bank. Such a bank does not deal with the general public. It actsessentially as
Government`s banker, maintain deposit accounts oI all other banks and advancesmoney to other banks,
when needed. The Central Bank provides guidance to other bankswhenever they
Iace any problem. It is thereIore known as the banker`s bank. The ReserveBank oI
India is the central bank oI our country.The Central Bank maintains record oI Government revenue and expenditure under
various heads.It also advises the Government on monetary and credit policies and decides on the interest ratesIor
bank deposits and bank loans. In addition, Ioreign exchange rates are also determined by thecentral bank.Another
important Iunction oI the Central Bank is the issuance oI currency notes, regulating their circulation in the country
by diIIerent methods. No other bank than the Central Bank can issuecurrency.
b) Commercial Banks
Commercial Banks are banking institutions that accept deposits and grant short-term loans andadvances to their
customers. In addition to giving short-term loans, commercial banks also givemedium-term and long-term loan
to business enterprises. Now-a-days some oI the commercial banks are also providing housing loan on a
long-term basis to individuals. There are also manyother Iunctions oI commercial banks, which are
discussed later in this lesson.
Types of Commercial banks:
Commercial banks are oI three types i.e., Public sector banks,Private sector banks and Foreign
banks.(i)
Public Sector Banks
: These are banks where majority stake is held by the Government oI India or Reserve Bank oI India. Examples
oI public sector banks are: State Bank oI India,Corporation Bank, Bank oI Boroda and Dena Bank, etc.( i i)
Private Sectors Banks
: In case oI private sector banks majority oI share capital oI the bank is held by private
individuals. These banks are registered as companies with limitedliability. For example: The Jammu
and Kashmir Bank Ltd., Bank oI Rajasthan Ltd.,Development Credit Bank Ltd,
Lord Krishna Bank Ltd., Bharat Overseas Bank Ltd.,Global Trust Bank, Vysya Bank, etc.( iii)
oreignBanks
: These banks are registered and have their headquarters in a Ioreign country but operate their branches in our
country. Some oI the Ioreign banks operating in our country are Hong Kong and
Shanghai Banking Corporation (HSBC), Citibank, AmericanExpress Bank, Standard & Chartered Bank,
Grindlay`s Bank, etc. The number oI Ioreign banks operating in our country has increased since the Iinancial
sector reIorms oI 1991.
c) Development Banks
Business oIten requires medium and long-termcapital Ior purchase oI machinery and equipment,Ior using latest technology,
or Ior expansion and modernization. Such Iinancial assistance is provided by Development
Banks. They also undertake other development measures like ubscribing to the shares
and debentures issued by companies, in case oI under subscription oI the issue by the public.
Industrial Finance Corporation oI India (IFCI) and State FinancialCorporations
(SFCs) are examples oI development banks in India.
d)

Co-operative Banks
People who come together to jointly serve their common interest oIten Iorm a co-
operativesociety under the Co-operative Societies Act. When a co-operative
society engages itselI in banking business it is called a Co-operative Bank. The society has
to obtain a licence Irom theReserve Bank oI India beIore starting banking business. Any co-
operative bank as a society isto Iunction under the overall supervision oI the Registrar, Co-
operative Societies oI the State.As regards banking business, the society must Iollow the guidelines set and issued by the
ReserveBank oI India.
Types of Co-operative Banks
There are three types oI co-operative banks operating in our country. They are primary
creditsocieties, central co-operative banks and state co-operative banks. These banks are
organizedat three levels, village or town level, district level and state level.(i)
Primary Credit Societies
: These are Iormed at the village or town level with borrower and non-borrower members
residing in one locality. The operations oI each society arerestricted to a small area so that the
members know each other and are able to watch over the activities oI all members to prevent Irauds.( ii )
Central Co-operative Banks
: These banks operate at the district level having some oI the primary credit societies belonging
to the same district as their members. These banks provide loans to their members (i.e., primary credit societies) and
Iunction as a link betweenthe primary credit societies and state co-operative banks.( iii)
State Co-operative Banks
: These are the apex (highest level) co-operative banks in allthe states oI the country. They mobilise
Iunds and help in its proper channelisation amongvarious sectors. The money reaches the individual borrowers
Irom the state co-operative banks through the central co-operative banks and the primary credit
societies.
e) Specialised Banks
There are some banks, which cater to the requirements and provide overall support Ior settingup
business in speciIic areas oI activity. EXIM Bank, SIDBI and NABARD are examples oI such
banks. They engage themselves in some speciIic area or activity and thus, are
calledspecialised banks. Let us know about them.
i.Export mport Bank of ndia (EXM Bank)
: II you want to set up a business Ior exporting products abroad or importing products IromIoreign countries Ior sale in our country,
EXIM bank can provide you the required support and assistance. The bank grants
loans toexporters and importers and also provides inIormation about the international
market. Itgives guidance about the opportunities Ior export or import, the risks involved in it and
thecompetition to be Iaced, etc.
Smal l ndustri es Devel opment Bank of ndi a ( SDB ) :
II you want to establish asmall-scale business unit or industry, loan on easy terms can be available
through SIDBI. Italso Iinances modernisation oI small-scale industrial units, use oI new technology and marketactivities.
The aim and Iocus oI SIDBI is to promote, Iinance and develop small-scaleindustries.
iii.National Bank for Agricultural and Rural Development (NABARD):
It is a centralor apex institution Ior Iinancing agricultural and rural sectors. II a person is engaged
inagriculture or other activities like handloom weaving, Iishing, etc. NABARD can providecredit, both short-
term and long-term, through regional rural banks. It provides Iinancialassistance, especially, to co-
operative credit, in the Iield oI agriculture, small-scale industries,cottage and village industries handicraIts and allied economic
activities in rural areas.
ntext Questions 15.2
IdentiIy the type oI bank being talked about in each oI the Iollowing statements:(a)The bank that
undertakes to subscribe to shares and debentures oI a company in case
oI under subscription.(b)The bank that provides assistance and guidance Ior export oI
products abroad.(c)The bank Iormed by a group oI people to serve their common
interest.(d)The bank that issues currency notes.(e)The commercial bank
where the government holds majority stake.
15.6unctions of Commercial Banks
The Iunctions oI commercial banks are oI two
types.( A ) P r i m a r y I u n c t i o n s ; a n d ( B ) S e c o n d a r
y I u n c t i o n s . Let us discuss details about these Iunctions.
(i) Primary functions
The primary Iunctions oI a commercial bank include:a)Accepting deposits; and b)Granting loans and
advances.a)
Accepting deposits
The most important activity oI a commercial bank is to mobilise deposits Iromthe public. Peoplewho have surplus
income and savings Iind it convenient to deposit the amounts with
banks.Depending upon the nature oI deposits, Iunds deposited with bank also earn
interest. Thus
deposits with the bank grow along with the interest earned. II the rate oI interest is higher, publicare motivated to
deposit more Iunds with the bank. There is also saIety oI Iunds deposited withthe bank.
b)Grant of loans and advances
The second important Iunction oI a commercial bank is to grant loans and advances. Such loansand advances
are given to members oI the public and to the business community at a higher rateoI interest than allowed by
banks on various deposit accounts. The rate oI interest charged onloans and advances varies
according to the purpose and period oI loan and also the mode oI repayment.
i ) L o a n s
A loan is granted Ior a speciIic time period. Generally commercial banks provide short-termloans. But term
loans, i.e., loans Ior more than a year may also be granted. The borrower may be given the entire
amount in lump sum or in instalments. Loans are generally grantedagainst the security oI certain assets.
A loan is normally repaid in instalments. However, itmay also be repaid in lump sum.
i i ) Ad v a nc e s
An advance is a credit Iacility provided by the bank to its customers. It diIIers Irom loan inthe
sense that loans may be granted Ior longer period, but advances are normally granted Ior a short period oI
time. Further the purpose oI granting advances is to meet the day-to-dayrequirements oI business.
The rate oI interest charged on advances varies Irom bank to bank.Interest is charged only on the amount
withdrawn and not on the sanctioned amount.
Types of Advances
Banks grant short-term Iinancial assistance by way oI cash credit, overdraIt and bill discounting.Let us learn
about these.
a ) Ca s h Cr e d i t
Cash credit is an arrangement whereby the bank allows the borrower to draw amount uptoa
speciIied limit. The amount is credited to the account oI the customer. The customer canwithdraw this
amount as and when he requires. Interest is charged on the amount actuallywithdrawn. Cash
Credit is granted as per terms and conditions agreed with the customers.
b ) O v e r d r a f t
OverdraIt is also a credit Iacility granted by bank. A customer who has a current accountwith the
bank is allowed to withdraw more than the amount oI credit balance in his account.It is a temporary
arrangement. OverdraIt Iacility with a speciIied limit may be allowed either on the security oI assets, or
on personal security, or both.
c)Di scount i ng of Bi l l s
Banks provide short-termIinance by discounting bills, that is, making payment oI the amount beIore the due date oI the bills
aIter deducting a certain rate oI discount. The party gets theIunds without waiting Ior the date oI
maturity oI the bills. In case any bill is dishonoured onthe due date, the bank can recover the amount
Irom the customer.
Secondary functions
In addition to the primary Iunctions oI accepting deposits and lending money, banks perIorm anumber oI other
Iunctions, which are called secondary Iunctions. These are as Iollows-a.Issuing letters oI credit,
travellers cheque, etc. b.Undertaking saIe custody oI valuables, important document and
securities by providingsaIe deposit vaults or lockers.c.Providing customers with
Iacilities oI Ioreign exchange dealings.d. Trans Ier r i ng money Irom one account
t o anot her; and Ir om one branch t o anot her branch oI the bank through
cheque, pay order, demand draIt.e.Standing guarantee on behalI oI its customers,
Ior making payment Ior purchase oI goods, machinery, vehicles
etc.I.Collecting and supplying business inIormation.g. Providing reports on the
credit worthiness oI customers. i.Providing consumer Iinance Ior individuals by way oI
loans on easy terms Ior purchaseoI consumer durables like televisions, reIrigerators,
etc. j.Educational loans to students at reasonable rate oI interest Ior higher studies, especiallyIor
proIessional courses.
ntext Questions 15.3
State which oI the Iollowing statements are True and which are Ialse. Write T` Ior True and F`Ior a False
statement:(a)Loans and advances are both granted by banks to customers Ior a long
period oI time.(b)Banks keep our jewellery and important documents saIe with
them.(c)Banks grant loans to students Ior their studies at reasonable interest
rate.(d)Discounting oI bills is done by banks Iree oI cost.(e)Through overdraIt,
a customer can withdraw more money than the amount in his/her
bank account.

15.7E-banking (Electronic Banking)
With advancement in inIormation and communication technology, banking services are also madeavailable through
computer. Now, in most oI the branches you see computers being used torecord
banking transactions. InIormation about the balance in your deposit account can
beknown through computers. In most banks now a days human or manual teller counter is
beingreplaced by the Automated Teller Machine (ATM). Banking activity carried on through computersand other electronic
means oI communication is called electronic banking` or e-banking`.

Letus now discuss about some oI these modern trends in banking in India.
Automated Teller Machine
Banks have now installed their own Automated Teller Machine (ATM) throughout the country atconvenient locations. By using
this, customers can deposit or withdraw money Irom their ownaccount any time.


Debit Card
Banks are now providing Debit Cards to their customers having saving or current account in the banks. The
customers can use this card Ior purchasing goods and services at diIIerent places inlieu oI cash.
The amount paid through debit card is automatically debited (deducted) Irom thecustomers`
account.


Credit Card
Credit cards are issued by the bank to persons who may or may not have an account in the bank.Just like debit
cards, credit cards are used to make payments Ior purchase, so that the individualdoes not have to carry
cash. Banks allow certain credit period to the credit cardholder to make payment oI the
credit amount. Interest is charged iI a cardholder is not able to pay back thecredit
extended to him within a stipulated period. This interest rate is generally quite high.


Net Banking
With the extensive use oI computer and Internet, banks have now started
transactions over Internet. The customer having an account in the bank can log into the bank`s website and
accesshis bank account. He can make payments Ior bills, give instructions Ior money transIers,
Iixeddeposits and collection oI bill, etc.


Phone Banking
In case oI phone banking, a customer oI the bank having an account can get inIormation oI
hisaccount, make banking transactions like, Iixed deposits, money transIers, demand draIt, collectionand payment oI bills, etc. by
using telephone .As more and more people are now using mobile phones,
phone banking is possible throughmobile phones. In mobile phone a customer can receive and send
messages (SMS) Irom and tothe bank in addition to all the Iunctions possible through phone banking.
ntext Questions 15.4
Match the statement in column A with the word(s) / terms in column B:
C o l u m n
A C o l u m n
B
( a ) T h e b a n k i n g I a c i l i t y t
h a t h e l p s u s t o m a k e ( i ) A T
M payments out oI our bank account withoutactually carrying money with
us.( b ) T h e b a n k i n g I a c i l i t y e n a b l i n
g u s t o d e p o s i t ( i i ) P h o n e B a n k i n
g or withdraw cash 24 hours a day
T h e I a c i l i t y t h a t h e l p s u s t o p e r I
o r m b a n k i n g ( i i i ) C r e d i t C a r d transactions over the
Internet.( d ) W e c a n g e t i n I o r m a t i o n a b o
u t t h e b a l a n c e i n ( i v ) D e b i t C a r d ou
r bank account over the mobile phone usingthis
Iacility( e ) T h e I a c i l i t y t h a t e n a b l e s u s t o m a
k e p a y m e n t I o r ( v ) N e t B a n k i n g purchase oI goods
by taking credit Irom the
bank

15. 8What You Have Learnt

A bank is an institution that accepts deposits Irom public and lends money to the peoplewho
need it.

Banking is an important auxiliary to trade.

Banks encourage savings and act as an intermediary between depositors and borrowers.

They help in credit transactions, Iacilitate export and import, help in national developmentand raise people`s
standard oI living.

Types oI banks-The Central Bank, RBI in India, acts as the government banker and issues
currencynotes in the country. It also acts as the banker`s bank.-The Commercial Banks provide
short and medium term loans and charge interest on it.They are oI three types Public Sector
Banks, Private Sector Banks and Foreign Banks.-Development banks lend Iunds to business Ior
medium to long term.-Co-operative banks are Iormed to serve common interest oI members. In
India, we have Primary Credit Societies (village level), Central co-operative Banks (district level) andState
Co-operative Banks (State level).-EXIM Bank provides guidance and support to
exporters and importers.-NABARD helps in Iinancing agricultural and other rural activities.

Functions oI Commercial Banks:- Primary Iunctions include accepting deposits, granting loans, advances, cash,credit,
overdraIt and discounting oI bills.- Secondary Iunctions include issuing letter oI credit, undertaking saIe custodyoI
valuables, providing consumer Iinance, educational loans, etc.

E-banking: With advancement in inIormation and communication technology, banking is perIormed
electronically through Credit Card, Debit Card and ATM, etc