BANKING KNOWLEDGE

BANKING

Bank: Bank is a lawful organization which accepts deposits that can be withdrawn on demand. It also lends money to individuals and business houses that need it.

Role Of Banking : Banks provide funds for business as well as personal needs of individuals. They play a significant role in the economy of a nation. Let us know about the role of banking.

• It encourages savings habit among the people and thereby makes funds available for productive use.  
• It acts as an intermediary between people having surplus money and those requiring money for various business activities.
• It facilitates business transactions through receipts and payments by cheques  instead of currency.
• It provides loans and advances to businessmen for short term and long term purposes.
• It also facilitates import export transactions.
• It helps in national development by providing credit to farmers, small-scale industries and self-employed people as well as to large business houses which lead to balanced economic development in the country.
• It helps in raising the standard of living of people in general by providing loans for purchase of consumer durable goods, houses, automobiles, etc..

Types Of Banks :

There are various types of banks which operate in our country to meet the financial requirements of different categories of people engaged in agriculture, business, profession, etc.. On the basis of functions, the banking institutions in India may be divided into the following types :

1.   Central Bank (RBI, in India)

2.   Commercial Banks

a. Public Sector Banks

b. Private Sector Banks

c. Foreign Banks

3.   Development Banks

4.   Co-Operative Banks

a. Primary Credit Societies

b. Central Co-Operative Banks

c. State Co-Operative Banks

5.   Specialized Banks(EXIM Bank, SIDBI, NABARD) 


The functions of commercial banks are of two types:

• Primary Functions


• Secondary Functions

Primary Functions :

1. Accepting deposits and
2. Granting loans and advances

Secondary Functions :

Ø  Issuing letters of credit, travellers cheque,etc..

Ø  Undertaking safe custody of valuables, important document and securities  by providing safe    deposit vaults or lockers.

Ø  Providing customers with facilities of foreign exchange dealings.

Ø  Transferring money from one account to another; and from one branch to another branch of the bank through cheque, pay order, demand draft.

Ø  Standing guarantee on behalf of its customers, for making payment for purchase of goods, machinery, vehicles etc..

Ø  Collecting and supplying business information.

Ø  Educational loans to students at reasonable rate of interest for higher studies, especially for professional courses.

E-Banking(Electronic Banking) :

      With advancement in information and communication  technology, banking services are also made available  through computer. Now, in most of the branches you see computers being used to record banking transactions. Banking Activity carried on through computers and other electronic means of communication is called “e-banking” or “electronic banking”.

Automated Teller Machine(ATM) :

      Banks have now installed their own ATM throughout the country at convenient locations. By using this, customers can withdraw money from their own account 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 for purchasing goods and services at different places in lieu of cash. The amount paid through debit card is automatically debited(deducted) from the customer’s 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 for purchase, so that the individual does not have to carry cash. Banks allow certain credit period to the credit card holder to make payment of the credit amount. Interest is charged if a card holder is not able to pay back the credit extended to him within a stipulated period. This interest rate is generally quite high.

Net Banking : 

      With the extensive use of 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 access his bank account. He can make payments for bills, give instructions for money transfers, fixed deposits and collection of bill, etc..

Reserve Bank Of India :

Establishment :

      The RBI was established on April 1,1935 in accordance with the provisions of the RBI Act,1934. The central office of the RBI was initially established in calcutta but was permanently moved to Mumbai in 1937. The central office is where the Governor sits and where polocies are formulated. Though originally privately owned, since nationalization in 1949, the RBI is fully owned by the Government of India.

Main Functions :

Monetary Authority : Formulates, implements and monitors the monitory policy.

Regulator and supervisor of the financial system : Prescribes broad parameters of banking operations within which the country's banking and financial system functions.

Manager Of Foreign Exchange : Manages the Foreign Exchange Management Act, 1999.

Issuer Of Currency : Issues and exchanges or destroys currency and coins not fit for      circulation.

Development Role : Performs a wide range of promotional functions to support national objectives.

Related Functions : Acts as a Banker to the Government and Banker to Banks.

Monetary Policy :

      Monetary policy refers to the use of instruments under the control of the central bank to regulate the availability, cost and use of money and credit.

      The Goal : achieving specific economic objectives, such as low and stable inflation and promoting growth.

The main objectives of monetary policy in India are :

1. Maintaining price stability

2. Ensuring adequate flow of credit to the productive sectors of the economy to support economic growth.

3. Financial Stability

Direct Instruments :

1. Cash Reserve Ratio(CRR) : The share of net demand and time liabilities that banks must maintain as cash with Reserve Bnk. The Present CRR is 4.75%.

2. Statutory Liquidity Ratio(SLR) :  The share of net demand and time liabilities that banks must maintain in safe and liquid assets, such as, government securities, cash and gold. The present SLR is 24.0%.

3. Refinance facilities : Sector-specific refinance facilities (e.g., against lending to export sector) provided to banks.

Indirect Instruments :

1. Liquidity Adjustment Facility(LAF) : Consists of daily infusion or absorption of liquidity on a repurchase basis, through Repo (Liquidity Injection) and Reverse Repo(Liquidity Absorption) auction operations, using government securities as collateral.

2. Open Market Operations : Outright sales/purchases of govt securities, in addition to LAF, as a tool to determine the level of liquidity over the medium term.

3. Market Stabilization Scheme : The instrument for monetary management was introduced in 2004. Liquidity of a more enduring nature arising from large capital flows is absorbed through sale of short-dated govt securities and treasury bills. The mobilised cash is held in a seperate govt account with the Reserve bank.

4. Repo/Reverse Repo Rate : These rates under LAF determine the corridor for short-term money market interest rates. 
      Repo Rate is the rate of interest at which RBI lends to banks against sale of Government securities. The present Rpo Rate is 8.50%.
      Reverse Rpo is the rate which RBI borrows from the banks for short period of time. The present Reverse Repo rate is 7.50%.


5. Bank Rate : Bank rate is the rate of interest charged by RBI for re-discounting the bills of commercial banks or as a lender of last resort. The present Bank rate is 9.50%.