BANKING AND ACCOUNTS

12MD031-12MD040

Definition
Banking regulation act 1949 defines banking as accepting, for the purpose of lending or investment, of deposits of money from the public repayable on demand or otherwise and withdraw able by cheque, draft, order or otherwise.

Origin of Banking
The banking activities were started in different periods in different countries. Bank is derived from the French word banco or bancus or banc or banque. It means a bench.

Banker
A person who is doing the banking business is called a banker. A banker performs multifarious functions. A banker must be a man of wisdom. A banker is not only acting as e depository, agent, but also as a repository of financial advices.

Relationship with customer

A banker as a bailee. A banker as a trustee. Debtor creditor relationship. A banker as a creditor.

TYPES OF BANKS
Public sector bank. Private sector bank. Co operative bank.

Public sector bank

Public sector banks are banks where a majority stake (i.e. more than 50%) is held by a government. The shares of these banks are listed on stock exchanges. There are a total of 26 public sector banks in india e.g.:Allahabad bank. Andhra bank. Bank of India

Private sector bank

All those banks where greater parts of stake or equity are held by the private shareholders and not by the government are called private sector banks. E.g.:- HDFC bank. ICICI bank.

Co-operative bank
Co-operative bank is an autonomous association of persons united voluntarily to meet their member's financial (loans, deposits, other services), economic, social, and cultural needs and aspirations through a democratically controlled way.

CLASSIFICATION OF BANKS
Commercial banks Investment banks Exchange banks Cooperative banks Land development banks Saving banks Central bank

Commercial Banks
The commercial banks mobilise deposit from the public which are repayable on demand or at short notice. They lend to traders and manufacturers for short periods. They provide the working capital to the business in the form of overdraft and cash credit.

Investment/Industrial Banks
Investment banks provide medium and long term finance to industries to meet their fixed capital requirements. They help to promote new industries by underwriting the issue of securities. The industrial banks secure funds through share capital and debuntures. They also receive deposits from the public for long periods.

Exchange Banks
Exchange banks specialise in financing the foreign trade. They supply necessary foreign exchange required for settlement of transactions in foreign trade. The exchange banks discount foreign bills of exchange. Nowadays commercial banks themselves undertake foreign exchange business. So there is no separate bank called foreign exchange bank.

Co-operative Banks
Banks formed on the principle of co-operation are called co-operative banks. They provide short-term credit to agriculturists, artisans, small farmers and small scale industries. Co-operative banks accept all kinds of deposits and make loan to the members at lower rate of interest. These banks play a very useful role in financing agriculture and allied activities.

Land Development Banks

Agriculture require short-term and long-term loans. Land development banks provide long- term loans to agriculturists for purchasing tools and equipments and cattle and making permanent improvement in land.

Savings Bank
Savings banks are specialized institutions to collect savings from the poor and middle income people of the society. These banks primarily intended to encourage habits of thrift and savings among people with small income.

Central Bank
Every country has generally one central bank. The central bank acts as the leader of the money market; supervising, controlling and regulating the activities of the commercial banks and other financial institutions. It enforces monetary discipline in the countrys economy.

Organizational structure in Banks

An organization structure outlines the processes, policies and procedures a company will use on a day-to-day basis. Each company designs its structure based upon factors such as its industry, product and location.

 Identification: A banks organizational structure will usually depend on its size. Banks may use a functional strategy, where divisions separate based on the types of functions in which the bank engages. Function: Banks typically have a formal structure. This results in more bureaucracy than other companies, because banks face more scrutiny from government regulators. Allowing too many people decision-making authority can create compromising situations.

 Significance: Organizational structures also help companies create well-defined job positions with specific responsibilities. Because large financial institutions will offer several services--such as business loans, mortgages and general banking--individual responsibilities will ensure employees only focus on their job.

Role of bank in economy

Economic functions The economic functions of banks include: Issue of money, in the form of banknotes and current accounts subject to check or payment at the customer's order. These claims on banks can act as money because they are negotiable or repayable on demand, and hence valued at par. They are effectively transferable by mere delivery, in the case of banknotes, or by drawing a check that the payee may bank or cash.

Contd
Netting and settlement of payments banks act as both collection and paying agents for customers, participating in interbank clearing and settlement systems to collect, present, be presented with, and pay payment instruments. This enables banks to economize on reserves held for settlement of payments, since inward and outward payments offset each other. It also enables the offsetting of payment flows between geographical areas, reducing the cost of settlement between them.

Contd
Credit intermediation banks borrow and lend back-to-back on their own account as middle men. Credit quality improvement banks lend money to ordinary commercial and personal borrowers (ordinary credit quality), but are high quality borrowers. The improvement comes from diversification of the bank's assets and capital which provides a buffer to absorb losses without defaulting on its obligations.

Contd
Asset liability mismatch/Maturity transformation banks borrow more on demand debt and short term debt, but provide more long term loans. In other words, they borrow short and lend long. Money creation whenever a bank gives out a loan in a fractional-reserve banking system, a new sum of virtual money is created.

Merits of Banking

Demerits of Banking

BANK ACCOUNTS
BANKING REGULATION ACT 1949 Accounting year 31 march to 1 April.