1. UNIT 1

2. Introduction
Definition of banking – functions of bank - Working of Banks-broad concepts
Structure of Banking Industry(SBI, PSBs, Pvt. Banks, Foreign Banks, RRB’S, Cooperative Banks)
Services offered by Banks
Bank Finance for Industries – Working capital facilities, their estimation in terms of Tandon Committee’s second method; Types of W,C, facilities: Cash Credit (Hyp), Cash Credit(Pledge), Advance against bills, bills/ cheque Purchase facility – Term loans/ Project Finance – Non fund based facilities like LC, LG, etc. – Facilities for import/ export

3. BANKING
According to Sec 5(b) of the Banking Regulation Act 1949, Banking means Accepting , for the purpose of lending or investment, of deposit of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise. Banking Company means any company which transacts the business of banking in India. No Co. can carry on the business of banking in India unless it uses as part of its name at least one word Bank , Banker or Banking

4. Permitted Banking Activities
Under Section 6(1) of the Banking Regulation Act 1949
The borrowing, raising or taking up of money, the lending or advancing of money either upon or without security.
The drawing, making, accepting,discounting,buying,selling,collecting and dealing in bills of exchange , Promissory notes , coupons , Drafts, Railways Receipt, warrants, debentures, certificates and other instruments and securities whether transferable or negotiable or not.
The granting and issuing of LC, TC
The buying , selling and dealing in bullion,
The buying and selling of foreign exchange
The receiving of all kind of bonds or valuable, on deposit or for safe custody .

5. The proving of safe deposit vaults
The collecting and transmitting of money and securities
Acting as agent
Contracting for public and private loan and negotiating and issuing the same
Undertaking and executing trust
Undertaking the administration of estates as executor, trustee
Managing, selling and realising any property which may come into the possession of the company in satisfaction or part satisfaction of any of its claim

6. Features of Banking
Dealing in Money: The bank accept deposit from the public and advancing them as loan to the needy people. The deposit may be of different types- current, fixed, saving etc. based on various terms and condition.
Deposit must be withdrawable: the deposit made by the public can be withdrawable by cheque, draft and otherwise, i.e. the banks issue and pay cheques. The deposits are usually withdrawable on demand.
Dealing with credit: the banks are the institution that can create credit, i.e. creation of additional money for lending. Thus “ creation of credit “ is the unique feature of banking.
Commercial in nature: since all of the banking functions are carried on with the aim of making profit.
Nature of agent: besides the basic functions of accepting deposit and lending money as loan, bank possess the character of an agent because of their various agency services.

7. Evolution of Payments System
Precious metals like gold and silver (commodity money)
Paper currency
Checks
Electronic means of payment
Electronic money: Debit cards, Stored-value cards, Smart cards, E-cash

9. Progress of banking in India
Nationalisation of banks in 1969: 14 banks were nationalised
Branch expansion: Increased from 8260 in 1969 to in 2006
Population served per branch has come down from to 16000
A rural branch office serves 15 to 25 villages within a radius of 16 kms
However, at present only 32,180 villages out of 5 lakh have been covered

10. Deposit mobilisation:
(20 years)- 700% or 7 times
(20 years)- 3260% or 32.6 times
(11 years)- 1100% or 11 times
( 5 years) -700% or 7 times
Expansion of bank credit: Growing at 20-30% p.a. due to rapid growth in industrial and agricultural output
Development oriented banking: priority sector lending

11. Progress of banking in India
Diversification in banking: Banking has moved from deposit and lending to
Merchant banking and underwriting
Mutual funds
Retail banking
ATMs
Mobile Banking
Internet banking
Venture capital funds

12. Profitability of Banks
Reforms have shifted the focus of banks from being development oriented to being commercially viable
Prior to reforms banks were not profitable and in fact made losses for the following reasons:
Declining interest income
Increasing cost of operations

13. Profitability of banks (2)
Declining interest income was for the following reasons:
High proportion of deposits impounded for CRR and SLR, earning relatively low interest rates
Political interference- leading to huge NPAs
Rising costs of operations for banks was because of several reasons: economic and political

14. Profitability of Banks (3)
As per the Narasimham Committee (1991) the reasons for rising costs of banks were:
Uneconomic branch expansion
Heavy recruitment of employees
Growing indiscipline and inefficiency of staff due to trade union activities
Low productivity
Declining interest income and rising cost of operations of banks led to low profitability in the 90s

15. 23-Dec
6-Jan
17-Feb
3-Mar
14-Apr
28-Apr
4-Aug
10-Nov
26-Apr
10-May
24-May
5-Jul
19-Jul
30-Aug
11-Oct
11-Oct
25-Oct
8-Nov
17-Jan
13-Feb
27-Feb
24-Apr

17. STRUCTURE OF INDIAN BANKING SYSTEM

18. Reserve Bank of India Commercial Banks Regional Rural Banks
Cooperative Banks
Private Sector Banks
Public Sector Banks
State Cooperative Banks
Central/District Cooperative Banks
Indian Banks
Foreign Banks
Primary Credit Societies
State bank Group
Nationalised Banks
Old Banks
State Bank of India
New Banks
Subsidiary Banks
Local Area Banks

19. Structure of RBI
The organization of RBI can be divided into three parts:
1) Central Board of Directors.
2) Local Boards
3) Offices of RBI

20. Central Board of Directors :
The organization and management of RBI is vested on the Central Board of Directors. It is responsible for the management of RBI.Central Board of Directors consist of 20 members. It is constituted as follows. a)One Governor: it is the highest authority of RBI. He is appointed by the Government of India for a term of 5 years. He can be re-appointed for another term. b)Four Deputy Governors: Four deputy Governors are nominated by Central Govt. for a term of 5 years c)Fifteen Directors :Other fifteen members of the Central Board are appointed by the Central Government. Out of these , four directors,one each from the four local Boards are nominated by the Government separately by the Central Government.

21. Ten directors nominated by the Central Government are among the experts of commerce, industries, finance, economics and cooperation. The finance secretary of the Government of India is also nominated as Govt. officer in the board. Ten directors are nominated for a period of 4 years. The Governor acts as the Chief Executive officer and Chairman of the Central Board of Directors. In his absence a deputy Governor nominated by the Governor, acts as the Chairman of the Central Board. The deputy governors and government’s officer nominee are not entitled to vote at the meetings of the Board. The Governor and four deputy Governors are full time officers of the Bank.

22. Local Boards :
Besides the central board, there are local boards for four regional areas of the country with their head-quarters at Mumbai, Kolkata, Chennai, and New Delhi. Local Boards consist of five members each, appointed by the central Government for a term of 4 years to represent territorial and economic interests and the interests of co-operatives and indigenous banks. The function of the local boards is to advise the central board on general and specific issues referred to them and to perform duties which the central board delegates.

23. Offices of RBI:
The Head office of the bank is situated in Mumbai and the offices of local boards are situated in Delhi, Kolkata and Chennai. In order to maintain the smooth working of banking system, RBI has opened local offices or branches in Ahmedabad, Bangalore, Bhopal, Bhubaneshwar, Chandigarh, Guwahati, Hyderabad, Jaipur, Jammu, Kanpur, Nagpur, Patna, Thiruvananthpuram, Kochi, Lucknow and Byculla (Mumbai). The RBI can open its offices with the permission of the Government of India. In places where there are no offices of the bank, it is represented by the state Bank of India and its associate banks as the agents of RBI.

24. RESERVE BANK OF INDIA
The central bank of the country is the Reserve Bank of India (RBI). It was established in April 1935 with a share capital of Rs. 5 crores on the basis of the recommendations of the Hilton Young Commission. The share capital was divided into shares of Rs. 100 each fully paid which was entirely owned by private shareholders in the begining. The Government held shares of nominal value of Rs. 2,20,000.

25. The Reserve Bank of India Act, 1934 was commenced on April 1, 1935
The Reserve Bank of India Act, 1934 was commenced on April 1, The Act, 1934
(II of 1934) provides the statutory basis of the functioning of the Bank.
The Bank was constituted for the need of following:
To regulate the issue of banknotes
To maintain reserves with a view to securing monetary stability and
To operate the credit and currency system of the country to its advantage.

26. RBI’s Major Functions Supervisory & Regulatory
Promotional & Developmental
Refinance Activities

27. SUPERVISORY & REGULATORY
RBI’s Major Functions
SUPERVISORY & REGULATORY

28. PROMOTIONAL & DEVELOPMENTAL
RBI’s Major Functions
PROMOTIONAL & DEVELOPMENTAL

29. RBI’s Major Functions
REFINANCE ACTIVITIES

30. SCHEDULED AND NON SCHEDULED BANKS
In the RBI ACT OF 1934, all banks listed in the second schedule is known as Scheduled banks
Its paid up capital and reserve are not less than Rs 5 Lakhs.
All Scheduled bank operations are under strict surveillance of RBI.
All nationalised banks, most private sector banks, foreign banks are scheduled.
Most cooperative banks are non- scheduled (not subjected to strict financial discipline).

31. Advantages of scheduled banks: A)
Advantages of scheduled banks: A). RBI can rediscount the bills already discounted by them B). Their drafts, bank guarantee, letter of credit accepted in all government offices C). RBI acts as lender of last resort D). All government accounts and transaction through them E). More account holders and lesser interest payment towards deposits as compared to non scheduled banks

32. Non Schedule Banks:
Small size institutions which restrict their activities to local areas.
Paid up capital and reserves less than Rs 5 Lakhs
Can not deal in foreign exchange
After nationalization of banks almost all unscheduled banks weeded out.

33. Licensed Banks
No Bank can carry on the business of banking unless it hold a license granted by RBI
Provisions regarding License are contained in Section 22 of the Banking Regulation Act 1949
A license granted if RBI satisfied that the bank has the capacity to pay its depositors as and when they demand.
License can be cancelled at any time if RBI not satisfied with the working of bank.

34. Public Sector Banks
51% ownership with government PSUs include SBI, its subsidiaries and nationalized banks.
Old setup therefore capital assets are more
Branches are more including those in rural areas
Number of employees is high
Government control is more
NPA are much higher due to government interference

35. Private Sector Banks
Bank shall be listed as a public limited company under the Companies Act 1956.it will be governed by the provisions of Reserve bank of India Act and Banking Regulation Act.
The minimum paid-up capital shall be Rs 100 Crore with promoter’s contribution being 25% or 20% in case of paid up capital is more than Rs 100 Crore
The share of banks should be listed on stock exchange
Branch licensing shall be governed by existing policy whereby banks are free to open any branches without prior approval of RBI subject to satisfactory capital adequacy and prudential accounting norms.

36. Bank shall have to observe priority sector lending targets as applicable to other banks.
They are not allowed to setup a subsidiary or mutual funds in in first three years of establishment.

37. Revised guidelines issued by the RBI in Jan 2001. The major
changes are:
Minimum paid-up capital for a new bank should be Rs. 200 which shall be increased to Rs 300 crore in subsequent 3 yr. after establishment of business
A non banking financial company may convert in to a commercial bank. If it satisfies the criteria.
A large industrial house should not promote any new bank
Preference would be given to promoters with expertise of financing priority areas.

38. Public Sector Bank Vs Pvt. Sector Banks
Both public and private sector banks are integral to Indian
banking system and operate under the RBI’s regulations .
Ownership and functioning differ hugely.

39. Foreign Banks
In order to operate in india, the foreign banks have to obtain a
license from the Reserve Bank of India. For Granting The license
, The following factors are considered:
Financial soundness of the bank
International and home country rating
Economic and political relations
Min Capital Requirement USD 25 mn

40. Regional Rural Banks
Regional Rural Banks were setup by the government of india under the Regional Rural Bank Act 1976 with the specific purpose of providing credit and other facilities to the small and marginal farmers, agriculture laborers , small entrepreneurs in rural area 196 RRBs in india 29 RRBs have negative net worth of 1800 crore Approx branches Operating in 518 districts of 26 states

41. Structure:
RRBs have jointly setup by the Government of India, state Gov.
and sponsor commercial Bank.
Capital Requirement Rs 5 Crore
( 50% Central Gov. , 15% State Gov. and 35% by the sponsor bank)
Managerial assistance provided by the sponsor bank.
Chairman is to be appointed by sponsor bank in consultation with NABARD.
9 board of director headed by a chairman
RBI allowed to accept foreign currency deposit

42. Cooperative banks
Cooperative banks are a part of the set of institution( RBI, RRB,
NABARD & Commercial Banks), which are engaged in financing
rural & agricultural development.
Cooperative Banks carried on No profit No Loss basis.
Organized and managed on principal of cooperation, self help and mutual help.
Government sponsored and supported
Range of services narrow than the commercial banks
Too much dependence on RBI, NABARD & the government
Multiple regulation and control authorities .

43. Services Offered By Banks
The services offered by commercial banks can be classified in to
Services to Depositors
Services to Borrowers for providing credit to them
Other Services

44. The traditional services mainly related to
Maintenance of different types of deposit accounts
Grant advance through cash credit, overdraft and loan
Purchasing discounting bills
Collection of cheques, bills and other instruments
Issue of performance and financial guarantee
Remittance
Provision of facilities of safe deposit and safe custody
Purchase and sale of securities

45. Personal Loan scheme
Loan Participation
Schemes for financing small industrial units
Schemes for financing of agriculture
Financing of road transport operators, other small borrowers
Credit transfer system
Collection/payment of certain periodical receipts/payments on behalf of customers
Credit Cards
Travelers Cheques
Gift Cheques
Lock box and night safe services
Services after usual banking hours
Other services

46. Financial Assistance
provided by
Banks

47. The primary function of a commercial bank is that of a broker and dealer in society’s money. Bank mobilize a large fraction of the liquid saving of the nation , and allocate them successfully and productively to those who need it. The major portion of bank’s funds is employed by way of loans and advances from wherein banks earn interest, discounts and conversion fees.

48. Social Responsibility Risk Purpose Liquidity
Principles of Sound Lending
Safety & Security
Profitability
Social Responsibility
Risk
Purpose
Liquidity

49. Methods of Granting Advances

50. Construction of Shares
Commercial Banks
Working Capital
Term Loan
Medium Term
Long Term
Cash Credit
Pledge
Installment Credit
Equity Loan
Hypothecation
Industrial Estate
Over Draft
Construction of Shares
Purchased
Discounted
Bills
Machinery
Export Financing
Pre-Shipment
Post-shipment

51. Cash Credit is the most favored method for availing credit in
India. Under this system the banker fixes a cash credit limit on an
annual basis, and the customer is at liberty to withdraw any
amount as and when he need.
The bank fixes the cash credit limit of the borrower after studying the financial capacity, projected sales and past utilization of such limits
The borrower has to provide security of tangible assets ( in the form of pledge or hypothecation) or guarantees.
Interest is charged only on actual amount withdrawn

52. Pledge is the bailment of goods as security for the payment of
debt or performance of a promise.
The goods can be pledge by the owner, a joint owner, a mercantile agent.
The banker can retain the goods for the payment of the debt, for any interest or expenses
In case of non-payment, the banker has the right to sell the goods and recover the amount of loan along with the interest and expenses.
The right is not limited by the law of limitation.
Banker must take good care of goods and return them after the payment is made along with accretion.

53. Hypothecation
Hypothecation is the practice where a borrower pledges collateral to secure a debt. The borrower retains ownership of the collateral, but it is "hypothetically" controlled by the creditor in that they have the right to seize possession if the borrower defaults. A common example occurs when consumers enter into a mortgage agreement, where their house becomes collateral until the mortgage loan is paid off.

54. An overdraft is a short term credit facility. It is given to a current
account holder, by which he is allowed to withdraw more money
from his account then what is actually stands to his credit.
For granting an OD limit, the banker may insists on either a collateral security or grant it on the personal security of the borrower.
Interest is charged on the actual amount utilized and for the period that it is utilized

55. Short term facility for providing working capital is through
Bills
Short term facility for providing working capital is through
discounting and purchasing of bills.
Banker deduct certain amount from the face value as discount
Bills are considered highly liquid security

56. Term Loan
Loan can be broadly be categorised on the basis of the period sanctioned or on the basis of purpose of the loan. On the basis of period , they can be short term loan , medium term loan & Long term loan or a bridge loan Composite or consumption loans depends on their purpose.

57. Short Term Loan are loans which are granted for a period not exceeding one year. These are advances to meet the working capital requirements, against security of movable assets like goods, share, debentures etc. Medium and long term loan are usually called term loan. These loans are extended for periods ranging from one year to about ten year on the security of existing industrial assets or the assets purchased with the loan. Term loans are used for purchase of capital assets, for expansion, modernisation or diversification. Bridge Loans are essentially short term loans that are granted pending disbursement of sanctioned term loans.

58. Composite loans is taken for buying capital assets as well as for meeting working capital requirements. Consumption Loan is for consumption purpose like education, medical needs and automobiles.

59. Facilities for Import-Export

60. Pre-shipment or Packing Credit
Pre-shipment or Packing Credit implies the financial assistance provided to exporters prior to shipment of goods. It is essentially working capital made available for financing / purchasing/processing/manufacturing/transporting/warehousing of goods meant for export. All cost are eligible for being financed under packing credit

61. The viability of proposal, the integrity of the borrower and the capacity of the exporter to execute he order must be carefully examined.
The export contract should be valid and contain all detail.
The exporter should have complied with the exchange control regulation.
The commodity to be export should be allowed for export.
Export should not be in the caution list of RBI
Separate account should be opened for each packing credit except when running account facility is allowed
Packing credit advances are generally granted on secured basis only.
Pre-shipment finance is granted for 180 days. In case bank approves, it can be extended for another 90 days.

62. Post-shipment Finance
Post-shipment finance facility is granted to bridge the gap between the shipment of goods and the realization of proceeds.

63. The export document should be submitted within 21days from the date of export.
These documents, e.g. invoice, packing list, weight list, insurance certificate or original bills of lading should not be inconsistent with each other
The insurance policy should be adequate and properly signed, dated and stamped.
Bill of lading should also be properly signed, dated and stamped and in case of alteration , should be properly authenticated.

64. Letter of Credit
Letters of credit are often used in international transactions to ensure that payment will be received. Due to the nature of international dealings including factors such as distance, differing laws in each country and difficulty in knowing each part personally, the use of letters of credit has become a very important aspect of international trade. The bank also acts on behalf of the buyer (holder of letter of credit) by ensuring that the supplier will not be paid until the bank receives a confirmation that the goods have been shipped.

65. Revolving Letter of Credit: Revolving Letter of Credit is used when the delivery of goods is in form of partial/ multiple shipments. Revolving Letter of Credit keeps on revolving and is not restricted to a single transaction. Revolving Letter of Credit (LC) can be utilized for subsequent business transactions over a period of time on a continuous basis to the extent of limit sanctioned. The seller/buyer does not have to go to the bank for sanction of fresh limits every time he gets a new order for executing the same.

66. Back to Back Letter of Credit: A Letter of Credit (LC) is a mode of making payments for trade transactions. An Letter of Credit is a highly popular payment mode because it allows an importer or buyer to make secure payments to the exporter or seller. Back to Back Letter of Credit, one Irrevocable Letter of Credit facilitates the seller to obtain another Letter of Credit.

67. Revocable Letter of Credit: Revocable Letter of Credit means the payment against this L/C can be revoked by the issuing bank. The buyer may either amend the Letter of Credit or cancel it without the approval of the seller. The payment against Revocable Letter of Credit is not for sure and hence this type of Letter of Credit is not commonly used. The Seller has meager chances to get loan against Revocable LC

68. Irrevocable Letter of Credit: Irrevocable Letter of Credit cannot be cancelled. This seller is Assured of payment for his supply of goods/services provided all terms and conditions of L/C are conformed to. This mode of payment is generally used in international trade transactions. As the payment against this Irrevocable Letter of Credit is Guaranteed by the issuing bank and the holder of this Irrevocable Letter of Credit (seller) can borrow short term finance from any other bank or lending institution at a very low rate of interest and within a very short time.

69. Development Banks
Development banks are the institutions engaged in the promotion and development of industry, agriculture and other key sectors.
National or regional financial institution designed to provide medium- and long-term capital for productive investment. Such investment is usually accompanied by technical assistance.
Some development banks are government-owned, while others are private. Many have been established under the protection of the World Bank.
Among the largest are the Inter-American Development Bank, the Asian Development Bank, and the African Development Bank

70. Development bank may be defined as a financial institution concerned with providing all types of financial assistance (medium as well as long-term) to business units in the form of loans, Underwriting , investment and guarantee operations and development in general and industrial area

71. Features A development bank does not accept deposits from the
public like commercial banks and other financial institutions who entirely depend upon saving mobilization.
It is a specialized financial institution which provides
Medium term and long-term lending facilities.
It is a multipurpose financial institution. Besides providing
financial help it undertakes promotional activities also. It
helps an enterprises from planning to operational level.
It provides financial assistance to both private as well as
public sector institutions.

72. The role of a development bank is of gap filler, when assistance from other sources is not sufficient then this channel helps. It does not compete with normal channels of finance.
Development banks primarily aim to accelerate the rate of growth. It helps industrialization specific and economic development in general.
The objective of these banks is to serve public interest rather than earning profits.
Development banks react to the socio-economic needs of development.

73. Objectives Lay Foundations for Industrialization Meet Capital Needs
Need for Promotional Activities
Help Small and Medium Sectors'

74. Role of development banks in financial system
Providing Funds
Infrastructural Facilities
Promotional Activities
Development of Backward Areas
Planned Development
Accelerating Industrialization
Employment Generation