MANAGING THE ECONOMY

THE ROLE OF MONETARY POLICY

Introduction:
In the modern age ,banks are the important part of man’s
economic life. As we know that finance is the life blood of the
organization , banks help in providing fund to the economy. In
modern times bank occupy pivotal position in the development of
business and industry. Finance is the life blood and controlling
nerve centre of business and banks arrange right amount of finance
at right time .Today bank is such an important industry that we
cannot imagine our day to day life without bank. It has become
part and parcel of our life . Modern banks are acting as
friend ,philosopher and guide for the business and industry .
Numerous , varied and ever increasing function and services to the
business and industry . We all are aware that war devastated
JAPAN and GERMANY economy was rehabilitated and
restructured only due to co-operation and support of banks.

Banks are essential for the fast economic development on

the nation . Bank is a financial institution which deals with other
people’s money ie.., money given by depositors . Banks provide
number of services to its customers as well as to economic
activities. There are different kinds of banks in an economy i.e
private bank , government bank , etc. It also helps in strengthening
the commercial activities as well as domestic processes. Bank is one
of the most important aids to trade. Banks accept deposits, grant
loans , make payment of bills , rent , etc on behalf of its customers.
 MEANING

A bank is a financial institution that provides banking and

other financial services to their customers. A bank is generally
understood as an institution which provides fundamental banking
services such as accepting deposits and providing loans. There are also
nonbanking institutions that provide certain banking services
without meeting the legal definition of a bank.

Banks are a subset of the financial services industry. A banking

system also referred as a system provided by the bank which offers
cash management services for customers, reporting the transactions of
their accounts and portfolios, throughout the day. The banking
system in India should not only be hassle free but it should be able to
meet the new challenges posed by the technology and any other
external and internal factors. For the past three decades, India‘s
banking system has several outstanding achievements to its credit. The
Banks are the main participant’s of the financial system in India.
The Banking sector offers several facilities and opportunities to
their customers. All the banks safeguards the money and valuables
and provide loans, credit, and payment services, such as checking
accounts, money orders, and cashier‘s cheques. The banks also offer
investment and insurance products. As a variety of models for
cooperation and integration among finance industries have
emerged, some of the traditional distinctions between banks,
insurance companies, and securities firms have diminished. In
spite of these changes, banks continue to maintain and perform
their primary role accepting deposits and lending funds from
these deposits.
 Definition
According to section 5(b) of The Banking Regulation Act, 1949
defines Banking as:-

“The 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 or order or
otherwise.

Banking Regulation Act, 1949 (sec.5(c)), has defined the banking

company as, “Banking company means any company which
transacts business of banking in India”.

HISTORY

The first bank in India, though conservative, was established in

1786.From 1786 till today, the journey of Indian Banking System
can be
Segregated into three distinct phases:

 Early phase of Indian banks, from 1786 to 1969

 Nationalization of banks and the banking sector reforms,
from 1969 to 1991
 New phase of Indian banking system, with the reforms after
1991.

Phase 1
 The first bank in India, the General Bank of India, was set up
in1786. Bank of Hindustan and Bengal Bank followed. The East
India Company established Bank of Bengal (1809), Bank of Bombay
(1840), and Bank of Madras (1843) as independent units and called
them Presidency banks. These three banks were amalgamated
in1920 and the Imperial Bank of India, a bank of private
shareholders, mostly Europeans, was established. Allahabad Bank
was established, exclusively by Indians, in 1865. Punjab National
Bank was set up in 1894 with headquarters in Lahore. Between1906
and 1913, Bank of India, Central Bank of India, Bank of Baroda,
Canara Bank, Indian Bank, and Bank of Mysore were setup. The
Reserve Bank of India came in 1935.

During the first phase, the growth was very slow and banks also
experienced periodic failures between 1913 and 1948. There were
approximately 1,100 banks, mostly small. To streamline the
functioning and activities of commercial banks, the Government of
India came up with the Banking Companies Act, 1949, which was
later changed to the Banking Regulation Act, 1949 as per amending
Act of 1965 (Act No. 23 of 1965). The Reserve Bank of India (RBI)
was vested with extensive powers for the supervision of banking in
India as the Central banking authority. During those days, the
general public had lesser confidence in banks. As an aftermath,
deposit mobilization was slow. Moreover, the savings bank facility
provided by the Postal department was comparatively safer, and
funds were largely given to traders.

Phase 2
 The government took major initiatives in banking sector
reforms after Independence. In 1955, it nationalized the Imperial
Bank of India and started offering extensive banking facilities,
especially in rural and semi-urban areas. The government
constituted the State Bank of India to act as the principal agent of
the RBI and to handle banking transactions of the Union
government and state governments all over the country. Seven
banks owned by the Princely states were nationalized in 1959 and
they became subsidiaries of the State Bank of India. In 1969,
14commercial banks in the country were nationalized. In the
second phase of banking sector reforms, seven more banks were
nationalized in 1980. With this, 80 percent of the banking sector in
India came under the government ownership.

Phase 3

This phase has introduced many more products and facilities in

the banking sector as part of the reforms process. In 1991, under the
chairmanship of M Narasimham, a committee was set up, which
worked for the liberalization of banking practices. Now, the
country is flooded with foreign banks and their ATM stations.
Efforts are being put to give a satisfactory service to customers.
Phone banking and net banking are introduced. The entire system
became more convenient and swift. Time is given importance in all
money transactions. The financial system of India has shown a
great deal of resilience.

Banking in India
 In India, banks are segregated in different groups. Each group
has its own benefits and limitations in operations. Each has its own
dedicated target market. A few of them work in the rural sector
only while others in both rural as well as urban. Many banks are
catering in cities only. Some banks are of Indian origin and some
are foreign players.

Banks in India can be classified into:

 Public Sector Banks

 Private Sector Banks
 Cooperative Banks
 Regional Rural Banks
 Foreign Banks

One aspect to be noted is the increasing number of foreign banks

in India. The RBI has shown certain interest to involve more
foreign banks. This step has paved the way for a few more foreign
banks to start business in India.

1. Dealing in Money:
Bank is a financial institution which dealswith other people's
money i.e. money given by depositors.

2. Individual / Firm / Company:

A bank may be a person, firmor a company. A banking company
means a company which is inthe business of banking.

3. Acceptance of Deposit:
A bank accepts money from the peoplein the form of deposits
which are usually repayable on demand orafter the expiry of a fixed
period. It gives safety to the deposits ofits customers. It also acts as
a custodian of funds of its customers.
4. Giving Advances:
A bank lends out money in the form of loansto those who require it
for different purposes.
5. Payment and Withdrawal:
A bank provides easy payment andwithdrawal facility to its
customers in the form of cheques anddrafts; it also brings bank
money in circulation. This money is in theform of cheques, drafts,
etc.
6. Agency and Utility Services:
A bank provides various bankingfacilities to its customers. They
include general utility services andagency services.
7. Profit and Service Orientation:
A bank is a profit seekinginstitution having service oriented
approach.
8. Ever increasing Functions:
Banking is an evolutionary concept.There is continuous expansion
and diversification as regards thefunctions, services and activities
of a bank.
9. Connecting Link:
A bank acts as a connecting link betweenborrowers and lenders of
money. Banks collect money from thosewho have surplus money
and give the same to those who are inneed of money.
10.Banking Business:
A bank's main activity should be to dobusiness of banking which
should not be subsidiary to any otherbusiness.