Definition of a Bank and Banker (Banking Regulation Act, 1949)

1. Bank Definition: The Banking Regulation Act, 1949, defines

"banking" under Section 5(b) as the acceptance of deposits
from the public for lending or investment, repayable on demand or
otherwise, and withdrawable by cheque, draft, order, or
otherwise.

2. Banker Definition: As per Section 5(c), a "banking company"

refers to any company engaged in the business of banking as
defined in Section 5(b).

3. Essential Functions: A bank must accept deposits, provide

loans, and allow withdrawals, distinguishing it from non-banking
financial companies (NBFCs).

4. Regulation: The Reserve Bank of India (RBI) regulates banks

under this Act to ensure financial stability and public confidence in
the banking system.

5. Prohibited Activities: Banks cannot engage in trading

activities (other than for their own business) and must adhere to
RBI regulations regarding capital, reserves, and governance.

History of Banking in India

1. Ancient & Medieval Period (Before 18th Century)

o Banking in India dates back to the Vedic period (2000–1400

BCE), with references to money lending in scriptures like the
Manusmriti and Arthashastra.

o Indigenous banking systems such as Shroffs, Seths,

Sahukars, and Chettis played a crucial role in credit and
trade financing.

2. Colonial Period (18th–20th Century)

o The first modern bank in India was Bank of Hindustan

(1770), but it failed in 1832.

o The three Presidency Banks—Bank of Bengal (1806), Bank

of Bombay (1840), and Bank of Madras (1843)—were
established under British rule.

o In 1921, these were merged to form the Imperial Bank of

India, later nationalized as State Bank of India (SBI) in
1955.

3. Pre-Independence Era (1906–1947)

 o Swadeshi Movement (1906) led to the establishment of
Indian banks like Punjab National Bank (1894), Bank of
India (1906), and Central Bank of India (1911).

o Reserve Bank of India (RBI) was established in 1935 as

the central bank to regulate currency and banking operations.

4. Post-Independence & Nationalization (1947–1991)

o 1949: Banking Regulation Act was passed, bringing banks

under RBI’s supervision.

o 1969: 14 major banks were nationalized to increase financial

inclusion.

o 1980: Another 6 banks were nationalized, strengthening

government control over the banking sector.

5. Liberalization & Modern Banking (1991–Present)

o 1991: Economic reforms allowed private banks (HDFC, ICICI,

Axis) to emerge.

o 2000s: Growth of digital banking, ATMs, online banking,

and mobile banking.

o 2014–Present: Government initiatives like Jan Dhan Yojana,

UPI, Digital India, and fintech startups revolutionized
banking services.

Origin and Growth of Commercial Banks in India

1. Early Beginnings (18th–19th Century)

o The first modern bank in India, Bank of Hindustan (1770),

was established but failed in 1832.

o Presidency Banks—Bank of Bengal (1806), Bank of Bombay

(1840), and Bank of Madras (1843)—formed the backbone of
early banking.

o The three banks merged in 1921 to form the Imperial Bank

of India, later nationalized as State Bank of India (SBI) in
1955.

2. Emergence of Indian Commercial Banks (1906–1947)

o The Swadeshi Movement (1906) led to the rise of Indian

banks like Punjab National Bank (1894), Bank of India
(1906), and Central Bank of India (1911).
 o Reserve Bank of India (RBI) was established in 1935 as
the central bank to regulate commercial banking.

3. Post-Independence & Nationalization (1947–1991)

o 1949: Banking Regulation Act was passed, bringing banks

under RBI’s supervision.

o 1969: 14 major commercial banks were nationalized to

promote financial inclusion.

o 1980: Another 6 banks were nationalized, further increasing

government control.

4. Liberalization & Private Sector Growth (1991–Present)

o 1991: Economic reforms led to the entry of private banks

like HDFC, ICICI, and Axis Bank.

o 2000s: Rapid growth of digital banking, ATMs, and mobile

banking.

o 2014-Present: Fintech, UPI, and government schemes (e.g.,

Jan Dhan Yojana) transformed commercial banking.

Functions of Banks

1. Primary Functions

o Accepting Deposits: Savings, current, and fixed deposits.

o Providing Loans & Advances: Personal, business, and

industrial loans.

o Credit Creation: Banks lend more than the actual deposits

they hold, boosting economic activity.

2. Secondary Functions

o Agency Services: Fund transfers, bill payments, investment

advice.

o Utility Services: Locker facilities, foreign exchange, and

online banking.

o Financial Inclusion: Providing banking services to rural and

underprivileged areas.

Classification of Banks in India

 1. Commercial Banks (Profit-oriented, regulated by RBI)

o Public Sector Banks (SBI, PNB, Canara Bank)

o Private Sector Banks (HDFC, ICICI, Axis Bank)

o Foreign Banks (Citibank, HSBC, Standard Chartered)

2. Cooperative Banks (Community-focused, regulated by RBI &

NABARD)

o Urban Cooperative Banks (small-town banking)

o Rural Cooperative Banks (support agriculture & small

businesses)

3. Specialized Banks (Targeted financial services)

o Small Finance Banks (Ujjivan, AU Small Finance Bank)

o Payments Banks (Airtel Payments Bank, Paytm Payments

Bank)

o Development Banks (EXIM Bank, NABARD, SIDBI)

4. Central Bank (Reserve Bank of India - RBI)

o Regulates the banking system, issues currency, controls

inflation, and manages monetary policy.

Types of Deposits Offered by Banks

1. Demand Deposits (Withdrawable Anytime)

o Savings Account Deposits: Earns interest, allows limited

withdrawals.

o Current Account Deposits: No interest, used for business

transactions with unlimited withdrawals.

2. Time Deposits (Withdrawable After a Fixed Period)

o Fixed Deposits (FDs): Higher interest rates, withdrawal after

maturity.

o Recurring Deposits (RDs): Regular monthly deposits with

interest, matures after a fixed period.

3. Specialized Deposits

o Tax-Saver Fixed Deposits: 5-year lock-in, tax benefits under

Section 80C.
 o NRE/NRO Deposits: For Non-Resident Indians (NRIs) to
deposit foreign income.

4. Flexi Deposits (Hybrid of Savings + FD)

o Automatically transfers surplus savings into fixed deposits for

better interest.

5. Call and Term Deposits (For Businesses and Institutions)

o Call Deposits: Withdrawable on short notice.

o Term Deposits: Fixed for a longer period, higher interest

rates.

Relationship Between Banks and Customers

1. Debtor-Creditor Relationship

o When a customer deposits money, the bank is the debtor,

and the customer is the creditor.

o When a customer takes a loan, the roles reverse—bank

becomes the creditor, and the customer is the debtor.

2. Bailor-Bailee Relationship (Locker Services)

o The customer (bailor) deposits valuables in a bank locker, and

the bank (bailee) is responsible for their safety but does not
own them.

3. Principal-Agent Relationship (Bank as a Representative)

o The bank acts as an agent for customers in activities like fund

transfers, bill payments, investment services, and tax
collection.

4. Trustee-Beneficiary Relationship (Safe Custody of Assets)

o When banks manage customer investments or securities, they

act as a trustee holding assets for the customer’s benefit.

5. Lessor-Lessee Relationship (Bank Lockers)

o The bank (lessor) provides locker facilities to the customer

(lessee) for a rental fee, but the bank does not take
responsibility for valuables stored inside.

Reserve Bank of India and Credit Control

1. Role of RBI in Credit Control

 o The Reserve Bank of India (RBI), as the central bank,
regulates the money supply and credit to maintain economic
stability, control inflation, and promote growth.

2. Quantitative Credit Control Methods (Affecting Overall Credit

Supply)

o Bank Rate Policy: RBI changes the bank rate (interest rate
on loans to commercial banks) to control credit.

o Open Market Operations (OMO): Buying/selling

government securities to regulate liquidity.

o Cash Reserve Ratio (CRR): Percentage of a bank’s deposits

to be kept with RBI (higher CRR reduces lending).

o Statutory Liquidity Ratio (SLR): Banks must hold a fixed

percentage of deposits in cash, gold, or government
bonds.

3. Qualitative Credit Control Methods (Affecting Specific Sectors

or Borrowers)

o Selective Credit Controls (SCCs): RBI restricts credit for

speculative activities (e.g., stock trading).

o Margin Requirements: RBI controls how much banks can

lend against securities.

o Moral Suasion: RBI advises banks on credit policies without

legal enforcement.

4. Monetary Policy Instruments

o RBI implements Monetary Policy (Repo Rate, Reverse Repo

Rate) to manage inflation and economic growth.

5. Impact of Credit Control

o Inflation Control: Reducing money supply during high

inflation.

o Economic Growth: Encouraging lending to boost businesses

during slowdowns.

UNIT-2
Overview of the Reserve Bank of India Act, 1934
 1. Foundation & Purpose

o The RBI Act, 1934 established the Reserve Bank of India

(RBI) as the central bank to regulate banking, currency, and
monetary policy.

o It started operations on April 1, 1935, and was nationalized

in 1949.

2. Key Provisions

o Section 3: Establishes the RBI as a legal entity.

o Section 17: Defines RBI’s banking functions, including

lending to the government and commercial banks.

o Section 22: Grants RBI the sole right to issue currency

notes in India.

o Section 42: Mandates commercial banks to maintain a Cash

Reserve Ratio (CRR) with RBI.

3. Monetary & Regulatory Powers

o RBI controls inflation, liquidity, and interest rates through

monetary policy.

o It supervises banking institutions under the Banking

Regulation Act, 1949.

4. Currency Management

o RBI manages the issuance and supply of Indian Rupees,

ensuring monetary stability.

5. Recent Amendments & Role in Financial Stability

o RBI now oversees digital banking, fintech regulation, and

financial inclusion policies.

Functions of the Reserve Bank of India as a Central Bank

1. Monetary Authority

o Formulates and implements monetary policy to control

inflation, liquidity, and economic growth.

o Uses Repo Rate, Reverse Repo Rate, CRR, and SLR to

regulate money supply.

2. Issuer of Currency
 o Sole authority to issue currency notes under Section 22
of the RBI Act, 1934.

o Ensures currency stability and prevents counterfeiting.

3. Regulator and Supervisor of Banks

o Regulates commercial banks, cooperative banks, and

financial institutions under the Banking Regulation Act,
1949.

o Ensures financial stability by setting banking policies.

4. Foreign Exchange and Reserves Management

o Manages foreign exchange reserves and maintains

exchange rate stability.

o Regulates FOREX transactions under FEMA (Foreign

Exchange Management Act, 1999).

5. Lender of Last Resort

o Provides emergency funds to banks and financial

institutions to prevent financial crises.

6. Regulation of Non-Banking Financial Companies (NBFCs)

o Supervises and regulates NBFCs to ensure their operations

are stable and transparent.

7. Financial Inclusion & Development

o Promotes banking in rural areas through initiatives like Jan

Dhan Yojana, UPI, and digital banking.

Regulation and Supervision of Non-Banking Financial Companies

(NBFCs)

1. Definition of NBFCs

o Non-Banking Financial Companies (NBFCs) are financial

institutions that provide loans, asset financing,
investment services, and other financial activities but
do not hold banking licenses.

o Unlike banks, NBFCs cannot accept demand deposits or

issue cheques.

2. Regulatory Framework by RBI

 o Governed under the Reserve Bank of India Act, 1934.

o Registration with RBI is mandatory if NBFCs have an asset

size of ₹100 crore or more.

o Must maintain minimum capital adequacy ratios and

follow RBI’s guidelines on lending practices.

3. Types of NBFCs (Based on Activities)

o Asset Finance Companies (AFCs): Provide loans for

equipment and vehicles.

o Loan Companies: Offer personal and business loans.

o Infrastructure Finance Companies (IFCs): Fund

infrastructure projects.

o Microfinance Institutions (MFIs): Provide small loans to

low-income groups.

o Investment Companies: Engage in the buying and selling of

securities.

4. RBI’s Supervision & Compliance Requirements

o Capital Requirements: Must maintain a Net Owned Fund

(NOF) and adhere to Capital to Risk-Weighted Assets
Ratio (CRAR) norms.

o Asset Classification & Provisioning: Must classify assets

into standard, substandard, and doubtful categories and
make provisions accordingly.

o Prudential Norms: NBFCs must follow liquidity norms, risk

management guidelines, and governance rules.

5. Recent Regulations & RBI Actions

o Stricter KYC (Know Your Customer) norms to prevent

fraud.

o Tighter lending regulations to reduce non-performing

assets (NPAs).

o Supervision of digital lending platforms operated by

NBFCs to protect consumers.