UNIT – II

Central banking
Definition
A central bank is a public institution that manages the currency of a country or
group of countries and controls the money supply – literally, the amount of money in
circulation. The main objective of many central banks is price stability.

History of Central Banking

Period Key Developments
1400s– Early public banking concepts, such as the Taula de Canvi in Barcelona
1600s (1401), and municipal banks in Venice and Amsterdam.
Founding of national central banks: Sweden’s Riksbank (1668), Bank of
1600s–
England (1694), and Banque de France (1800), evolving into modern central
1800s
banking models.
Expansion in Europe and beyond; post-World War II adoption worldwide.
19th–20th
Central banks became the key issuers of fiat currency, replacing metallic
Century
standards.
U.S. established the Federal Reserve System via the Federal Reserve Act,
1913 (USA) introducing twelve regional banks and a governing board.

Functions of a Central Bank

The central bank’s authority and activities are comprehensive. Below are the
primary functions with their core applications and examples:
 Currency Regulator or Bank of Issue:
The central bank has the sole authority to print and distribute currency, which
ensures public confidence and control over money supply. For example, in India,
the RBI issues currency notes of all denominations (except for the ₹1 note, which
is issued by the Ministry of Finance).
 Banker to the Government:
The central bank manages the government’s banking transactions, holds its
deposits, makes payments, receives money, and manages government debt. It
also serves as an advisor on financial and monetary matters.
 Custodian of Cash Reserves:
Commercial banks are required by law to maintain a portion of their deposits as
reserves with the central bank. This reserve supports trust among depositors and
allows interbank funds transfers.
  Custodian of International Currency:
The central bank manages foreign exchange reserves (including gold and
international currencies) to keep the exchange rate stable. It buys and sells
foreign currency to adjust the supply as needed.
 Lender of Last Resort:
When commercial banks face financial difficulties, the central bank lends to them
to prevent collapse, protecting the entire financial system.
 Clearing House for Banking Transactions:
The central bank settles interbank payments by transferring funds between banks,
simplifying the clearing of cheques and other obligations.
 Controller of Credit:
The central bank regulates credit in the economy using tools like repo rates, cash
reserve ratios, and open market operations. This function helps in controlling
inflation and supporting growth.
 Protection of Depositors’ Interests:
By supervising and regulating banks and holding their reserves, the central bank
safeguards public interest and trust in the banking system.

Needs of Central Banking

A central bank is essential for the smooth functioning of a country’s monetary
and financial system. The need for central banking arises from the following economic
and financial responsibilities:
1. Issuance of Currency
 Central banks are the sole authority for issuing legal tender in most countries.
 Ensures uniformity, authenticity, and trust in the national currency.
 Prevents counterfeiting and maintains the public’s confidence in money.
Example: The Reserve Bank of India (RBI) issues all currency notes in India (except
coins).
2. Monetary Stability
 Central banks regulate the money supply and interest rates to control inflation
and deflation.
 Helps maintain price stability, which is essential for sustainable economic
growth.
Tools used: Repo rate, reverse repo rate, open market operations (OMOs), etc.
3. Control of Credit
 By managing credit creation, central banks ensure financial discipline in the
economy.
 Prevents issues like over-lending, excessive inflation, or asset bubbles.
Method: Setting Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR).
4. Lender of Last Resort
 During financial crises, central banks provide emergency funds to commercial
banks.
 Prevents the collapse of the banking system and restores confidence in financial
institutions.
Example: In the 2008 crisis, the U.S. Federal Reserve rescued failing banks with liquidity
support.
5. Foreign Exchange Regulation
 Manages a country’s foreign exchange reserves and stabilizes its currency in the
global market.
 Implements policies to maintain a stable exchange rate and controls capital flows.
Maintains balance of payments (BoP) and intervenes in the forex market when needed.
6. Regulation and Supervision of Banks
 Central banks ensure the soundness of the banking sector by enforcing laws and
capital requirements.
 Protects depositors’ interests, monitors risks, and ensures transparency in
operations.
Example: Basel norms implementation, bank licensing, audits.
7. Promotion of Economic Growth
 Aligns monetary policy with national economic goals such as:
o GDP growth
o Employment generation
o Poverty reduction
Coordinates with fiscal policy (government spending and taxation) for balanced growth.
8. Maintaining Public Confidence
 A central bank fosters trust in the financial system by:
o Acting independently
o Being transparent in decision-making
o Communicating policies clearly
Example: Regular press releases and reports by central banks.

Principles of Central Banking

Central banks play a vital role in ensuring monetary and financial stability. To
function effectively and independently, they follow certain core principles that guide
their operations.
1. Monopoly of Note Issuance
 The central bank is the sole authority to issue legal tender.
 Ensures uniformity, trust, and control over the money supply.
 Helps regulate inflation and currency value.
Example: The Reserve Bank of India issues all banknotes in India (except ₹1, which is
issued by the Government of India).
2. Independence from Political Influence
 The central bank should operate free from political pressures to make unbiased
decisions.
 Ensures long-term economic stability over short-term political gains.
 Most modern central banks are autonomous, though they remain accountable to
the government or parliament.
Example: European Central Bank (ECB) is highly independent in its decision-making.
3. Lender of Last Resort
 Central bank provides emergency liquidity support to commercial banks during
financial crises or bank runs.
 Prevents panic in the financial system and maintains confidence in banking
institutions.
Example: During the 2008 financial crisis, central banks worldwide provided massive
liquidity to stabilize markets.
4. Monetary Policy Formulation
 Central banks are responsible for designing and implementing monetary policy
to achieve:
o Price stability
o Economic growth
o Employment
o Exchange rate stability
 They use tools like:
o Repo/Reverse repo rates
o Open Market Operations (OMOs)
o Cash Reserve Ratio (CRR)
5. Price and Financial Stability
 Maintaining stable prices (low inflation) is a key objective.
 Stability in the financial system helps prevent economic shocks and promotes
investor confidence.
 Avoids situations like hyperinflation, deflation, or asset bubbles.
6. Credit Control
 Central banks regulate the supply and cost of credit in the economy.
 Ensures that credit flows to productive sectors and inflation remains under
control.
 Techniques:
o Quantitative (e.g., reserve ratios)
o Qualitative (e.g., margin requirements)
7. Supervision and Regulation of Banks
 Central banks oversee commercial banks to ensure:
o Solvency
o Liquidity
o Sound banking practices
 Prevents bank failures and protects depositors' interests.
Example: Basel Norms implementation is supervised by central banks.
8. Foreign Exchange Management
 Central banks manage:
o Foreign exchange reserves
o Exchange rate policies
 They intervene in the foreign exchange market to stabilize the currency and
maintain competitiveness.
9. Non-Profit Orientation
 Central banks are not driven by profits.
 Their goal is to promote public interest, such as economic growth and stability.
 Surpluses are often transferred to the government.
10. Transparency and Accountability
 Modern central banks maintain transparency through:
o Public reports
o Policy announcements
o Press releases
 Builds credibility and helps markets align with policy directions.
Example: Regular monetary policy statements by the Federal Reserve, RBI, etc.

Commercial Bank v/s Central Bank

Basis Commercial Bank Central Bank

An institution that
performs different
An apex body that
functions like accepting
controls, operates,
deposits, making
Meaning regulates, and directs a
investments with the
country's banking and
motive of earning
monetary structure.
profits, and granting
loans.

A commercial bank can The central bank is

Ownership
be owned and governed usually owned and
Basis Commercial Bank Central Bank

by the private sector or governed by the

government sector. government.

A commercial bank is
just a unit of a country's
The central bank is an
banking structure that
Status apex institution in the
operates under the
money market.
control of the Central
Bank.

A commercial bank
The central bank has a
does not have the
Issue of Currency sole monopoly on issue
power to issue
of currency.
currency.

The central bank does

The basic aim of a
not have a profit motive
Objective commercial bank is
and works in the public
maximisation of profits.
interest.

A commercial bank The central bank does

Public Dealing directly deals with the not directly deal with
public. the public.

There are a huge

number of commercial
There is only one
banks in a country. For
central bank in a
example, different
country. For example,
Number of Banks commercial banks in
the central bank of
India are the State Bank
India is the Reserve
of India, Canara Bank,
Bank of India.
Punjab National Bank,
etc.
 Credit creation in central banking
A central bank does not directly create credit; instead, it creates the monetary
base and then uses tools like the cash reserve ratio (CRR) to influence how commercial
banks create credit by lending out deposits. Commercial banks multiply initial deposits
by lending out a portion of these funds, a process limited by the CRR and other factors,
ultimately influencing the overall money supply in the economy.

The Central Bank's Role

 Monetary Base:
The central bank is the primary source of physical currency and controls the total
amount of money supplied to the economy.
 Reserve Requirements:
The central bank mandates that commercial banks hold a specific percentage of their
deposits in reserve, known as the Cash Reserve Ratio (CRR). This CRR is a key tool
used to control the money supply and the extent of credit creation.
 Monetary Policy:
The central bank influences the economy by adjusting the CRR, conducting open market
operations (buying/selling securities), and setting other policies that affect the amount of
reserves commercial banks have available to lend.

Commercial Banks' Role in Credit Creation

1. Receiving Deposits:
The process begins when the public deposits money into commercial banks.
2. Holding Reserves:
Commercial banks are required to keep a portion of these deposits with the
central bank as reserves.
3. Lending Excess Funds:
The remaining funds, known as excess reserves, can be lent out to borrowers.
4. Money Multiplier Effect:
When a bank lends money, the borrower uses it, and it eventually gets deposited
into another bank (or the same bank). This new deposit allows the bank to keep a
fraction as reserves and lend out the rest again, creating a multiplier effect that increases
the overall money supply.
5. Credit Multiplier:
The potential for credit creation is calculated using the formula: Credit Multiplier
= 1 / CRR. This multiplier determines how much money can be created from an initial
deposit.
Example: If a bank has an initial deposit and a CRR of 20% (or 0.20), the credit
multiplier is 1 / 0.20 = 5. This means that for every initial unit of currency deposited, the
banking system can potentially create five units of credit.
Limitations
The credit creation process is limited by factors such as the amount of money
people hold as cash (leakages), the willingness of banks to lend, and the willingness of
businesses and individuals to borrow.
Credit creation in central banking refers to the process by which the central bank and
the commercial banking system collectively expand the amount of money (credit)
available in the economy. It is a fundamental function of modern banking and plays a
critical role in influencing economic activity, inflation, and monetary policy.

Key Concepts of Credit Creation

1. Central Bank's Role
The central bank (like the Federal Reserve, ECB, or RBI) does not directly lend to the
public but facilitates credit creation by:
 Setting interest rates (monetary policy)
 Regulating the money supply
 Providing liquidity to commercial banks
 Acting as a lender of last resort
 Implementing reserve requirements
2. Commercial Banks’ Role in Credit Creation
Commercial banks are the actual creators of credit. When they receive deposits, they
keep a fraction (as reserves) and lend out the rest, thereby creating new money.
This is called fractional reserve banking.
Example of Credit Creation
Assume:
 Reserve Ratio = 10%
 Initial Deposit = $1,000
1. Bank A keeps $100 and lends out $900.
2. $900 is deposited in Bank B, which keeps $90 and lends $810.
3. This continues…
Total credit created = Initial Deposit × (1 / Reserve Ratio)
Total = $1,000 × (1 / 0.1) = $10,000
This is known as the money multiplier effect.
Tools the Central Bank Uses to Influence Credit Creation
Tool Description
Open Market Operations Buying/selling government securities to increase or
(OMO) decrease liquidity
Repo/Reverse Repo Rates Controls short-term borrowing/lending rates for banks
CRR (Cash Reserve Ratio) Portion of deposits banks must keep with the central bank
SLR (Statutory Liquidity Minimum reserves in liquid assets banks must maintain
Tool Description
Ratio)
Persuading banks to follow credit policies without formal
Moral Suasion
directives
Importance of Credit Creation
 Stimulates economic growth
 Facilitates investment and consumption
 Can help manage unemployment
 But excessive credit can lead to inflation or asset bubbles
Risks of Uncontrolled Credit Creation
 Inflation: Too much money chasing too few goods
 Debt accumulation
 Banking crises if loans go bad
 Currency devaluation

Commercial bank
Meaning
Commercial banks perform primary functions like accepting deposits from the
public and granting loans and advances to individuals and businesses to earn
interest. They also undertake secondary functions such as foreign exchange, providing
safe custody of assets, acting as agents for payments and collections, and offering various
other utility services.

Functions of commercial banking

Primary Functions
1. Accepting Deposits:
Banks accept various types of deposits from customers to provide a safe place for their
funds.
i) Current Account Deposits: Demand deposits that can be withdrawn at any time.
ii) Savings Account Deposits: For accumulating savings with limited withdrawal
facilities.
iii) Fixed Deposits: Term deposits held for a fixed period, earning higher interest.
Granting Loans and Advances:
Banks provide capital to businesses and individuals through different lending facilities.
2. Term Loans: Loans for a specific period.
3. Overdrafts: Allowing customers to withdraw more money than they have in their
account.
4. Cash Credit: Short-term loans against security.
5. Bill Discounting: Providing cash against a bill of exchange before its due date.
 Credit Creation:
Banks create money by lending out a portion of the deposits they receive, expanding the
overall money supply in the economy.
Secondary Functions
1. Agency Functions:
Banks act as agents for their customers in various capacities.
2. Collecting and Paying Bills: Managing payments for bills and collecting cheques on
behalf of customers.
3. Buying and Selling Securities: Performing transactions in the stock market for
clients.
4. Remitting Funds: Transferring money from one place to another.
General Utility Functions:
Providing a range of services to meet customer needs.
1. Safe Custody of Valuables: Offering safe deposit lockers for clients.
2. Foreign Exchange Business: Facilitating transactions in foreign currencies.
3. Letter of Credit: Issuing guarantees for international trade.
4. Providing Information: Offering financial and economic information to customers.

Advantages and disadvantages of commercial banking

Advantages of Commercial Banks
 Commercial banks have a widespread network of branches across the country,
including rural areas, providing easy access to financial services for a large portion of
the population.
 These banks offer a range of products such as savings accounts, fixed deposits,
personal loans, home loans, credit cards, and insurance services, catering to diverse
financial needs.
 Commercial banks provide business loans, trade finance, and working capital, fostering
entrepreneurship and industrial growth in India.
 With advancements in technology, commercial banks have integrated digital banking
services, including internet banking, mobile banking, and UPI payments, making
transactions faster and more convenient.
 Many government programs like Jan Dhan Yojana, PM Kisan, and others are routed
through commercial banks, enabling beneficiaries to access subsidies and financial
support directly into their accounts.
 Some banks offer investment advice, helping customers manage their wealth and
investments effectively.
Disadvantages of Commercial Banks
 Commercial banks often charge higher interest rates on personal loans, credit cards,
and other unsecured loans, which can burden borrowers, especially in times of
economic uncertainty.
  While large corporations may receive personalised loan packages, smaller businesses
and individuals may not get tailored solutions, impacting their growth prospects.
 Although rare, the failure of a commercial bank can cause panic among depositors.
Instances like PMC Bank have raised concerns about depositor safety.
 Many commercial banks levy service charges for various banking transactions and
maintain strict minimum balance requirements, which can add up and become costly
for account holders.
 Despite reaching rural areas, the quality of service and products available in urban
branches may not always be replicated in rural regions.

Personal banking
Personal banking functions include managing daily financial needs through
checking and savings accounts, offering credit services like loans and credit cards,
providing investment options such as certificates of deposit, and assisting with financial
planning for goals like retirement or education. These services are typically delivered
through branches, online platforms, and mobile apps, with personal bankers serving as
the primary point of contact for individuals.
Functions of Personal Banking
 Deposit accounts:
Opening and managing checking, savings, and money market accounts for everyday
transactions.
 Payment services:
Facilitating bill payments, fund transfers, and providing debit cards for convenient
access to funds.
Credit & Lending Services
 Loans: Offering various personal loans, including auto loans, and mortgages for
significant purchases.
 Credit cards: Providing credit cards for managing expenses and building credit history.
 Overdraft protection: Helping clients manage temporary shortfalls in their checking
accounts.
Investment & Wealth Services
 Investment products:
Offering investment options like certificates of deposit (CDs) and mutual funds.
 Financial planning:
Providing guidance for retirement, college savings, and other long-term wealth goals.
Other Functions
 Customer support: Offering customer-oriented service to resolve disputes and answer
inquiries.
 Digital banking: Providing access to services through mobile and online banking
platforms.
 Referral services: Directing clients to specialists within the bank for specialized needs
like complex investments or insurance products.
Advantages of Personal Banking
1. Convenience
o Easy access to financial services (e.g. online banking, mobile apps, ATMs).
o You can manage your accounts 24/7 from anywhere.
2. Personalized Services
o Banks offer tailored advice and financial products (loans, savings plans,
etc.) based on your personal needs.
3. Security
o Banks use strong security systems to protect your money and personal data.
o Deposits are usually insured (e.g. FDIC insurance in the U.S.).
4. Variety of Services
o Access to loans, credit cards, investment options, retirement accounts, etc.
o Simplifies money management in one place.
5. Record Keeping
o Automatic tracking of transactions helps with budgeting, taxes, and
financial planning.
6. Relationship Benefits
o Long-term customers may get better loan rates or waived fees.
o Personal bankers can assist with financial goals.
Disadvantages of Personal Banking
1. Fees and Charges
o Monthly maintenance fees, overdraft fees, ATM fees, etc., can add up.
o Some services may require minimum balances.
2. Privacy Concerns
o Banks collect and store a lot of personal financial data.
o Risk of data breaches or misuse of information.
3. Limited Interest Rates
o Savings and checking accounts often offer low returns compared to other
investment options.
4. Banking Hours (for physical branches)
o In-person services may be limited to business hours, which may not suit
everyone.
5. Risk of Over-Reliance
o Dependence on technology or one institution can be risky (e.g. system
outages, cyber attacks).
6. Complexity of Products
o Financial products can be hard to understand, and misinformed decisions
can lead to debt or losses.
 Corporate banking
Corporate banking offers large organizations financial services, including lending
(term loans, working capital loans), cash management and treasury services (payment
processing, liquidity management), trade finance (letters of credit), risk management
(hedging, derivatives), and advisory services for mergers and acquisitions (M&A) and
capital markets. These services facilitate a corporation's daily operations, growth, and
overall financial strategy by providing tailored solutions for complex financial needs.

Key Functions & Services

 Lending:
Providing various types of debt, such as term loans, revolvers (credit card-like facilities),
equipment financing, and real estate loans to support capital expenditures and
operational needs.
 Cash Management & Treasury:
Managing a company's cash flow, facilitating payments, and providing liquidity
management services to optimize cash on hand.
 Trade Finance:
Offering solutions like letters of credit to facilitate international and domestic trade by
ensuring payment to sellers and managing risks.
 Risk Management:
Providing instruments like hedging, derivatives, and foreign exchange services to help
corporations protect against financial risks, such as interest rate and currency
fluctuations.
 Advisory Services:
Offering expertise and guidance for complex financial activities such as M&A,
accessing capital markets, and corporate restructuring.
 Underwriting:
Assisting corporations in issuing and distributing new financial products, like bonds, to
raise capital.
 Asset Management:
Providing services to manage and grow a company's assets and investments.
Purpose of Corporate Banking
 Supports Growth:
Corporate banks help companies fund their expansion, modernization, and
diversification projects, which is crucial for economic development.
 Manages Daily Operations:
By providing essential financial services, corporate banks help companies handle their
day-to-day financial needs efficiently.
 Facilitates Capital Access:
 They act as a crucial link for large corporations to access capital markets and investment
banking services, often serving as a "sweetener" or entry point for larger deals.
 Creates Partnerships:
Corporate banking fosters strong, long-term relationships with large companies, making
them the first choice for future financial needs and advisory services.

Advantages of Corporate Banking

1. Access to Large Capital
Advantage: Corporations can access large-scale financing options such as
syndicated loans, working capital loans, and credit lines to fund expansion, operations, or
investments.
2. Tailored Financial Services
Banks offer customized financial solutions based on a company’s specific needs
(e.g., industry-specific lending, FX hedging, payroll services).
3. Efficient Cash Management
Tools like cash pooling, automated payment systems, and sweep accounts help
businesses manage liquidity efficiently.
4. Trade and Export Finance
Corporate banks facilitate international trade through letters of credit, bank
guarantees, and export/import financing, reducing risk in cross-border transactions.
5. Expert Financial Advice
Banks often provide dedicated relationship managers who offer insights into
market trends, financing strategies, and risk management.
6. Enhanced Credibility
Having a relationship with a well-known bank can enhance a company’s
reputation and creditworthiness in the market.
Disadvantages of Corporate Banking
1. High Fees and Charges
Corporate banking services often come with higher fees, including service
charges, interest rates on loans, and transaction costs.
2. Complexity and Bureaucracy
Processes like loan approvals or service onboarding can be slow and
bureaucratic, especially in larger banks with strict compliance and risk policies.
3. Stringent Loan Conditions
Banks may require extensive documentation, collateral, and restrictive
covenants for lending, limiting a company’s financial flexibility.
4. Exposure to Systemic Risk
Dependence on corporate banks can expose companies to systemic risks, such as
bank failures or tightening credit markets.
5. Limited Flexibility in Offerings
 Some banks may not be agile enough to provide innovative or tailor-made
solutions quickly, especially for fast-growing startups or SMEs.
6. Potential Conflicts of Interest
Large banks that serve multiple competitors in the same industry may create
conflicts of interest, especially in sectors like M&A or investment banking.

Major Types of Corporate Banking Services

 Cash Management:
This involves managing a company's treasury and liquidity through services like
payment processing, cash flow forecasting, and account management.
 Trade Finance:
These services support companies engaged in international trade, offering solutions such
as import finance, export finance, and international payment services.
 Working Capital Finance:
This focuses on providing short-term financing to help companies manage their daily
operations and meet immediate financial obligations.
 Investment Banking Services:
A branch of corporate banking that advises companies on raising capital, mergers and
acquisitions, and navigating public markets.
 Corporate Lending:
This includes various forms of debt financing for companies, such as term loans,
equipment finance, real estate finance, and syndicated loans.
 Securities Services:
Services focused on the management and administration of financial assets, which can
include custody, clearing, and trustee services.
 Treasury Solutions:
Comprehensive services to support a company's treasury operations, including cash
management, foreign exchange, and risk management.
Key Features of Corporate Banking
 Relationship-Based:
Corporate banking often involves a dedicated relationship manager and specialized
teams to provide personalized service and tailored solutions to corporate clients.
 Complexity:
The services offered are generally more complex and diverse than those for retail
banking customers, addressing large-scale financial needs.
 Client Focus:
Services are designed to cater to the specific financial requirements of businesses, from
small and medium-sized enterprises (SMEs) to large multinational corporations.
 Digital banking
Digital banking functions include accessing accounts, making fund transfers,
paying bills, managing investments, and applying for loans via online platforms or
mobile apps, offering 24/7 access without needing a physical bank branch. Key functions
also include advanced features like automated bill payments, budgeting tools, secure
biometric login options, and personalized financial insights, all designed for convenience
and efficiency.
Common Digital Banking Functions
 Fund Transfers: Easily send money to other accounts, both domestically and
internationally, through various payment platforms.
 Bill Payments: Pay utility bills, schedule recurring payments, and manage payees
directly through the digital platform.
 Account Management: Check account balances, view transaction history, and download
bank statements at any time.
 New Account Opening: Open new banking products, such as savings or deposit
accounts, without visiting a physical branch.
 Loan Applications: Apply for loans and other financial products through online
channels.
 Card Services: Request new or replacement payment cards and block lost or stolen cards
instantly.
 Currency Exchange: Conduct foreign currency exchanges through the digital platform.
 Automated Payments: Set up automatic payments for regular bills, loans, and other
recurring transactions.
 Cash Withdrawals: Access cash from automated teller machines (ATMs) which are
connected to the digital banking network.
 Investment Management: Access multiple investment options and manage investments
online.
Types of Digital Banking
These are the different types of digital banking services you can avail:
1. Unified Payment Interface (UPI)
UPI is a widely used digital payment system that allows you to transfer money directly
from your bank account to receivers through different mobile applications. It offers
seamless transactions using a virtual address, and you can link multiple bank accounts to
a single UPI app.
2. Internet Banking
Also known as net banking, this digital banking allows you to manage your bank
accounts online via your bank’s website. You can securely do different transactions,
 including fund transfers, bill payments, account management, etc., with your login
credentials.
3. Mobile Banking
In Mobile banking, you get a dedicated application on your smartphone to access banking
services. You can check your bank balance, make payments, and do other banking
activities conveniently anytime, anywhere.
4. Banking Cards
There are different types of banking cards in the digital banking system:
 Debit Cards: These cards are directly linked to bank accounts that allow you to
withdraw cash and purchase.
 Credit Cards: Credit cards allow you to make purchases on credit, and you can pay
them later than the due date.
 Prepaid Cards: Prepaid cards have no link to your bank accounts. You can load
money into these cards and use them.
 Virtual Debit Cards: These are electronic versions of debit cards for online
transactions.
5. Mobile Wallets
These digital wallets store money and allow you to transact through an app linked to your
bank account. It provides a convenient way to make payments for goods and services
online or in stores.
6. Bharat Interface for Money (BHIM)
This app facilitates simple payment transactions using UPI. You can make direct bank-
to-bank payments or request money using UPI IDs or QR codes.
7. Point of Sale (PoS)
PoS systems are electronic devices merchants use to process card payments at retail
locations. These systems allow you to pay via debit or credit card, which is convenient
for in-person transactions.

Services by Digital Banking

Some of the popular digital banking services are:
1. Account Management
You can easily access and manage your bank accounts online or through mobile apps.
You can check balances, view transaction history, and update your personal information
without visiting your home branch.
2.Fund Transfers
Digital banking allows for quick and easy fund transfers between accounts, whether
within the same bank or to different banks. You can make real-time payments with
services like NEFT, RTGS, and UPI.
 3. Bill Payments
You can pay utility bills, credit card bills, and other payments directly through digital
banking platforms. You can also schedule recurring payments using autopay options.
4. Loan Applications
You can apply for various types of loans, such as personal, home, and vehicle loans,
entirely online. Digital banking platforms streamline the application process with easy-
to-follow steps and instant approvals.
5. Investment Services
Some digital banking platforms offer investment products like mutual funds, fixed
deposits, NPS, bonds, etc. You can manage your investments using the same interface for
regular banking services.
Benefits of Digital Banking
Following is a list of advantages of using digital banking services:
 Convenience: You can access your accounts and complete transactions anytime and
anywhere. This eliminates the need to visit a bank branch.
 24/7 Availability: Digital banking ensures that financial services are available round
the clock, catering to your needs even outside traditional banking hours.
 Instant Transactions: You can transfer funds and make payments instantly with
just a few clicks.
 Enhanced Security: Banks implement advanced security measures such as
encryption and multi-factor authentication to protect your account from fraud and
unauthorized access.
 Multiple Payment Options: You can choose from various payment methods,
including mobile banking apps, debit cards, and digital wallets.
 Cost Efficiency: Digital banking reduces operational costs for banks, allowing you
to benefit from lower fees and better interest rates.
 Personalized Services: Banks analyze your financial data to offer customized
products and services. This enhances your overall banking experience.
 Environmentally Friendly: Digital banking minimizes the need for paper-based
transactions. It is a step towards reducing waste and promoting environmental
sustainability.
 Easy Access to Financial Products: You can apply for loans, manage investments,
and track expenses conveniently through digital platforms without needing in-person
visits.
Digital Banking vs Online Banking Differences
Is there any difference between digital banking and online banking? Read this table to
find out:
 Feature Digital Banking Online Banking

Digital Banking has a wider range Online banking primarily focuses

Range of of services such as investment on limited functions such as
Services options, budgeting tools, checking bank balances and fund
personalised advice, etc. transfers.

You can access it through different

Access channels such as smart devices, It can be accessed mainly with your
Channels mobile banking, social media bank's website or mobile app.
platforms, etc.

This aims for a seamless and

It gives convenience but may lack
Customer personalised experience using AI
the same level of personalisation
Experience and data analytics to give a better
and customisation.
customer experience.

Digital banking uses advanced

Security security measures (such as It has standard security measures
Measures biometric authentication) for such as login credentials and OTP.
enhanced protection.

Here you can get 24/7 customer

Customer support through various options Customer support is usually limited
Support such as chatbots and live chat to only during banking hours.
options.
Disadvantages of Digital Banking
With advantages, there are also some disadvantages you should know before using digital
banking services:
 Technical Issues: Network disruptions, app glitches, or server downtimes can
interfere with transactions and restrict access to funds during emergencies.
 Lack of Personal Relationships: Digital banking reduces direct interactions with
bank representatives. This absence of personal connection may also impact customer
satisfaction and trust.
 Internet Fraud: Scammers use techniques like phishing, malware, and SIM-jacking
to steal sensitive information. Banks work hard to improve their cybersecurity, but
it's important for everyone to stay alert.
 Limited Services: Some banking services, like withdrawing large amounts of cash
or signing important loan papers, still need you to visit a bank in person. This makes
digital banking not as convenient for certain financial needs.
  Security Concerns: Despite strong security protocols, digital banking platforms
remain vulnerable to cyber threats. You must follow safe online banking practices to
protect yourself from identity theft and financial fraud.

Core banking system

A core banking system (CBS) is a centralized IT solution that enables banks to
manage essential financial operations and deliver services to customers from any branch
or channel in real-time, creating a unified view of customer accounts and
transactions. This centralized database supports functions like account management, loan
processing, and customer relationship management, allowing for seamless, location-
independent banking experiences.

Key Functions of a Core Banking System

 Account Management:
Handles various account types (savings, checking, loans) and manages account details.
 Transaction Processing:
Manages real-time transactions like deposits, withdrawals, fund transfers, and payments,
ensuring accuracy and immediate updates to account balances.
 Loan Management:
Oversees the entire loan lifecycle, from application and disbursement to repayment and
interest calculations.
 Customer Relationship Management (CRM):
Stores customer information and interactions to enable personalized services and
improve customer satisfaction.
 Interest Computation:
Automatically calculates and applies interest on loans and deposits based on established
rates.
 Reporting and Analytics:
Generates financial and operational reports and provides analytics on customer data and
banking activities.
 Security and Compliance:
Implements advanced security features like data encryption and multi-factor
authentication and assists in complying with regulatory requirements.
 Product Management:
Supports the development and management of various banking products, from
traditional offerings to new digital services.
Benefits of a Core Banking System
 Operational Efficiency:
Automates processes, reducing manual work and leading to faster, more accurate
transactions.
 Enhanced Customer Experience:
Provides 24/7 access to banking services through various channels, increasing
convenience and accessibility.
 Improved Data Management:
Centralizes data on a single platform, ensuring consistency and providing a unified view
of customer and account information.
 Increased Revenue:
Facilitates the launch of new, innovative financial products and helps banks adapt to
market changes.
 Greater Security:
Employs robust security measures to protect sensitive customer data from cyber threats.
Evolution of Core Banking
Traditionally, core banking systems relied on mainframe, on-premises
infrastructures that were difficult to update and upgrade. The current trend is towards
modernization with cloud-native solutions, APIs, and AI to support greater flexibility,
scalability, and integration with new fintech services.
Banks are crucial for economic development as they mobilize savings, channel
them into productive capital formation, and provide financing for individuals, businesses,
and infrastructure projects, thereby creating jobs and stimulating growth. They also
facilitate international trade, promote entrepreneurship, ensure financial stability through
secure payment systems, and foster financial inclusion by providing access to services for
underserved communities.

Advantages & Disadvantages of core banking system:

Advantages of Core Banking System
The Core Banking System in India has brought numerous changes to the banking
system that has multiple advantages. These advantages are highlighted hereunder.
1. Efficiency of operations
CBS has brought much-needed efficiency to banking operations through significant
automation at various levels. The time taken for the execution of transactions has
significantly reduced enabling enhanced customer experience.
2. Enhanced security
The technology-driven core banking system provides enhanced security for banking
transactions as well as consumer data. This is instrumental in the transfer of huge volumes
of funds between parties as well as countries in real-time at the same time protecting
customers from data privacy issues.
3. Better integration and access for customers
Core Banking System allows customers to access their accounts in real-time on
multiple devices through their single secure login. There is reduced human intervention
resulting in lower errors and cases of fraud in the system.
 4. Cost-effective banking operations
The automated banking process has reduced the burden of paperwork on the entire
banking system as a whole. It has made the processes more cost-effective in terms of
reduced operations costs, storage costs, transportation costs, and more.
Disadvantages of Core Banking System
The core banking system has become the basis of modern-day banking. However,
there are a few limitations in CBS too. These limitations are highlighted below.
1. High initial investment cost
The Core Banking System requires banks and financial institutions to invest in
significant assets like the infrastructure and the hardware and software needed for the
successful implementation of the banking systems. Such initial investment costs can be
quite high, especially for small or medium-sized banks, and can break them even before
they get a chance to flourish.
2. Technical and cyber security risks
The security of the customer’s data is of paramount importance in a banking system.
This data is often prone to cyber security breaches and other technical risks that can lead to
damage or loss of customer data or key banking transactions.
3. Dependence on technology for connectivity
The basis of the Core Banking System is the use of technology for the integration of
all the branches of the bank and to provide a seamless banking experience to the customers
irrespective of their location. Therefore, CBS has a huge reliance on technology, and any
minor or major disruption in the system can lead to a delay in the transfer of funds or in
extreme cases, loss of funds or the relevant data.
4. Constant updation to technological advancements
Users of CBS need to constantly adapt to the changing technical scenario in the
banking sector. This can be quite challenging, especially for small and medium-sized banks
as the high costs of technologies and the constant updation of their systems can eat into
their profits.
Conclusion
The implementation of the core banking system in the country revolutionalised the
banking sector and brought it to par with the global world. It has become an essential part
of the banking industry in India, and it has helped banks to streamline their operations,
reduce costs, and provide better customer service. With the increasing adaptation of fintech
and new-age banking services, CBS is viewed to play a critical role and fulfill the needs of
the average consumers.
Roles of Banks in Economic Development
 Mobilizing Savings and Capital Formation:
Banks gather savings from individuals and businesses and transform them into capital
for investment. This process of capital formation is essential for economic growth,
leading to the creation of new businesses and improved productivity.
 Providing Financing and Credit:
Banks extend loans to various sectors, including agriculture, industry, and trade. This
financing enables entrepreneurs to start new businesses, supports existing ones, and
funds large-scale projects like infrastructure, all contributing to job creation and
economic expansion.
 Facilitating Trade and Commerce:
Banks provide essential financial services, such as bank drafts, checks, and letters of
credit, which streamline transactions and make trade more efficient. They also play a
vital role in managing foreign exchange for international trade.
 Promoting Entrepreneurship and Innovation:
By providing credit and financial support, banks empower entrepreneurs to innovate and
grow, which drives economic dynamism and job creation.
 Ensuring Financial Stability and Systems:
Banks manage efficient and secure payment and settlement systems, ensuring smooth
financial transactions throughout the economy.
 Fostering Financial Inclusion:
Banks extend financial services to previously underserved and marginalized
communities, improving their economic mobility and reducing poverty.
 Supporting Economic Growth and Poverty Reduction:
By directing capital to productive uses and creating opportunities, banks significantly
contribute to overall economic growth and help reduce poverty levels within a country.
 Implementing Monetary Policy:
Banks are key players in implementing central bank monetary policies, which influence
economic activity and stability.