BANKING & INSURANCE

SESSION 1 CH 1: BASICS OF BANKING

SPECIALIZATION: MMS (FINANCE GROUP)

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Session Contents
z z z z z Introduction (Basics) to Banking Features of Banking Classification of Banking Role of Banks in an Economy Importance of Banking and Economic Development

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INTRODUCTORY
z Money is life and blood of banking business. It can be in the form of:
y Legal currency of a country y Precious metals like gold and silver y Precious stones

z So before understanding basics of banking, it is important to understand the meaning of money.

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Introduction to Money and Banking

z Basic fundamentals on Money and Banking. Will help us to become more familiar with how Monetary Policy works. z What is Money in an economy?
y Money -- Facilitator of Trade.

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Specific Roles of Money as a Facilitator of Trade

z Medium of Exchange -- Money is exchanged for goods and services z Standard of Value -- Value is measured in dollars (the price tag)

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z Standard of Deferred Payments -Loans and financial instruments are denominated in terms of money. z Store of Value -- People can use money when they wish.

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Definitions of Money
z M1 = Currency held by the public + Travelers Checks + Checkable Deposits z M2 = M1 + Savings Deposits + Small Time Deposits + Money Market Mutual Funds
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Definitions of Money Supply Components

z Currency Held by the Public -- Paper money and coin held by consumers and firms. z Chequable Deposits -- bank deposits which customers can write cheques upon.
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Other Bank Deposits

z Savings Deposits -- No chequable privileges, but customers can withdraw funds at any time without penalty. z Time Deposits -- A contract specifying payment of principal and interest in an explicit way over a given interval. Withdrawal before maturity results in penalty.
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Money Market Mutual Funds

z offered by private institutions (not banks) z pools investor funds z invests in short-term bonds z pays interest based upon overall portfolio z restricted chequability (based upon minimum size of cheque)
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Quirks -- Defining Money

z M1 emphasizes medium of exchange function of money. M2 represents a broader measure. z Chequable deposits, not cheques, are included in the money supply definitions. z Credit card purchases are not included in money supply definitions.
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Quirks -- Defining Money

All the above instruments are called financial assets.

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Liquidity of Financial Assets

z Liquidity -- how easily an asset can be converted into a medium of exchange.
z Ranking (most to least) based upon liquidity: (1) Currency, (2) Checkable Deposits, (3) Savings Deposits, (4) Time Deposits.
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The Role of Interest Rates

z The Interest Rate -- compensates financial investors for inconvenience due to holding asset (e.g. loss of liquidity). z Ranking (most to least) based upon interest rate: (1) Time Deposits, (2) Savings Deposits, (3) Checkable Deposits, (4) Currency.
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How to Manage this money?

z Now the question arises how this money should be managed so that its distribution is equally spread in the country? z The answer is an appointment of a department to manage it and distibute it to the needy and receive it who have surplus. This department is popularly known as Bank.
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Introduction to Bank
Origin of term Bank is traced as follows:
` German word, Banck (heap or mound or joint stock fund) Italian Word Banco (heap of money). French word bancus or banque which means bench/Chest a place where valuables are kept.
A story follows this :
Story of Jews of Lombardy?

English Word Bank (an institution accepting money as deposit for lending)
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What is Banking?
Section n5(b) of The 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 withdrawable by chaque, draft , order or otherwise.

Bank is a factory of credit. It is not only trader in money but also manufacturer of money.

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What is Banking?
Bank is one that collects money form those who have it to spare or who are saving it out of their income and lends the money so collected to those who require it. (Crowther) No person or body corporate otherwise can be a banker who does not (i) take deposit accounts, (ii) take current Accounts, (iii) issue and pay chaques and (iv) collects chaque, for his customers. (Sir John Paget) There fore..
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Difference between Bank and Money Lending

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Banks as Financial Intermediaries Financial Intermediary -- An institution that borrows from lenders, then loans to borrowers.

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The Role of Financial Intermediaries

Takes advantage of institutional fact of life -- lenders want to lend small, but borrowers want to borrow large. Pools small savers funds into large amount, available for private borrowers (e.g. mortgages, businesses).
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Features of Banking
The characteristics derived from the definition of banking are as follows:
Deals in money Deposits must be withdraw able Dealing with credit Commercial in nature Nature of agent

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History of Banking
Banking in India is very old. First the East India Company established English Agency Houses.
These were basically trading firms and also carrying banking business as part of their mail business. These failed in 18th Century due to Dual business activities and lack of funds.

In 19th C EIC established first three banks:

Bank of Bangal 1809 Bank of Bombay 1840 Bank of Madras 1843 (also known as Presidency Banks)
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History of Banking
In19-20th C, A number of banks with Indian Management were established as a result of Swadeshi Movement.
Punjab National Bank Ltd. 1895. The Bank of India Ltd 1906 The Indian bank Ltd. 1907 The Bank of Baroda Ltd. 1908 The Central Bank of India Ltd. 1911 Imperial Bank of India Act was passed in 1920 to amalgamate presidency Banks and the Imperial Bank of India was established in 1921 after this amalgamation.

Establishment of Central Bank

RBI was set up in 1935 ( on the recommendations of baning Enquiry Committee, the RBI Act 1934 was set up)
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History of Banking:
Salient Features of RBI It started as Private shareholders bank with fully paid up capital of Rs 5 Cr. It was constituted to:
Regulate the issue of Bank Notes Secure monetary stability in India Operate the currency and credit system of the country Post independence RBI was nationalized in 1949 As on today there are 80000+ branches in operation in India.

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History of Banking:
Salient Features of RBI
1955, State Bank of India Act was passed and Imperial Bank of India was nationalized. The new name given was State Bank of India. 1959, SBI Subsidiary Act was passed and 8 subsidiary banks of SBI were opened:
SBI of Bikaner SBI of Jaipur SBI of Indore SBI of Mysore SBI of Patiyala SBI of Hyderabad SBI of Saurashtra SBI of Travancore The major nationalization took place in 1969. 14 banks were nationalized.
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Classification of Banks
Exchange Banks (Authorized Dealers in Foreign Exchange)

Cooperative Banks

Land Mortgage Banks Indigenous Banks

Industrial or development Banks

Savings bank

Commercial bank

Supranation al Bank

Central Bank

The principal banking institutions of a country may be classified into the following types:

International Banks

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Banking System (Structure)

Economic Conditions

The structure of Banking differs from country to country depending upon:

financial System.

Political Structure and

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Banking System (Structure)

The classification of banks depends upon volume of operations, business pattern and areas of operations. These are termed as Systems of Banking. The identified systems or structure of banking are: Unit Banking Branch banking Correspondent Banking Chain Banking Group Banking Pure Banking Mixed Banking Relationship banking Narrow Banking Universal banking Regional banking

Retail banking
Wholesale Banking Private banking

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Unit Banking: Advantages

1. 2. 3. 4. 5. 6. 7. 8. 9. Easy Establishment Easy Management and Control Quick Decisions Local Development Personalized Services No Chance for regional disparities Promotes efficient working Inefficient Banks cannot survive No chance for Monopoly
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Unit Banking: Disadvantages

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. No ability to face crisis No geographical depression of risks Variation of interest rates Lack of diversification of deposits and assets Not able to provide adequate banking facilities Inconvenience in remittance of funds No importance to backward areas Weaker sections may be neglected. Influence of local pressures Lack of division of labour and specialization Unhealthy competition
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Organizational Structure of Branch banking - 1

Head office

Zonal Office
Regional Office Divisional (District) Offices Branches
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Organizational Structure of Branch banking - 1

Head office

Zonal Office 1 (East)

Zonal office 2 (West)

Zonal Office 3 (North)

Zonal Office 4 (South)

Regional Offices

Regional offices

Regional offices

Regional offices

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Scheduled Banking Structure in India

Scheduled Banks in India

Scheduled Commercial Banks
Scheduled Cooperative Banks
Regional Rural banks
Scheduled Cooperative Urban banks Scheduled State Cooperative Banks

Public Sector banks

Private Sector banks

Foreign Banks in India

Nationalized Banks

State Bank and its Associates

Old Private banks

New Private banks

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Major Banking Services

Acceptance of deposits

Advancing loans

Remittance facilities

Allied non banking functions like agency and utility services such as collection of chaques, bills, payment of premia, accepting bill of exchange, provision of safe deposit vaults etc.

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Bank and Economic Development

Employment

Production

Industrial Development

Banking System
Investments
Consumption

Savings

Income

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Importance of Banking and Economic Development

1. Capital Formation 2. Creation of Money 3. Strengthen the link between organized and unorganized sectors 4. Provision of long term loans 5. Helping agriculture and small scale industry 6. Entrepreneurial Development 7. Chaque system- a medium of exchange 8. Regulation of the flow of national savings 9. Comprehensive infrastructural facilities 10. Maintaining Balance of Trade 11. Mitigating the effects of trade cycle 12. Sectoral Priorities 13. Catalyst in Social Change 14. Effective implementation of monetary policy

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Next Session will be on

Structure, Growth and Development of Banking in India (Banking Sector Reforms) Recent Trends in Indian Banking Kindly read the chapter and come prepared.

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Assignment for Self Study-1

Kindly read in detail about each type of banking system from the book.

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