CHAPTER 1

BANKING AND WORKING SYSTEM OF BANKS

INTRODUCTION
Modern commercial banking, in its present form, is of recent origin. Though bank is
considered to be an ancient institution just like money. It’s evolution can be traced in the
functions of money lender, the goldsmiths and the merchants.
A bank has been often described as an institution engaged in accepting of deposits and granting
loans. It can also be described as an institution which borrows idle resources, makes funds
available to. It does not refer only to a place of tending and depositing money, but looks after
the financial problems of its consumers.
This era is the age of specialization with the changing situation in the world economy, banking
functions have broadened. Financial institutions which are shaped by the general economic
structures of the country concerned vary from one country to another. Hence, a rigid
classification of banks is bound to the unrealistic.
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 participants 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.

ORIGIN AND DEVELOPMENT OF BANKING

There seem so be no uniformity amongst the economist about the origin of the word ‘Bank’. It
has been believed that the word ‘Bank’ has been derived from the German word ‘Bank’ which
means joint stock of firm or from the Italian word ‘Banco’ which means a heap or mound. In
India the ancient Hindu scriptures refers to the money - lending activities in vedic period. They
performed most of those functions which banks perform in modern times. During Ramayana
and Mahabharata eras also banking had become a full-fledged business activity. In other words
the development of commercial banking in ancient times was closely associated with the
business of money changing. In simple words, bank refers to an institution that deals in money.
This institution accepts deposits from the people and gives loans to those who are in need.
Besides dealing in money, bank these days perform various other functions, such as credit
creation, agency job and general service. Bank, therefore is such an institution which accepts
deposits from the people, gives loans, creates credit and undertakes agency work.

MEANING OF BANKING
You know people earn money to meet their day to day expenses on food, clothing, education of
children, having etc. They also need money to meet future expenses on marriage, higher
education of children housing building and social functions. These are heavy expenses, which
can be met if some money is saved out of the present income. With this practice, savings were
available for use whenever needed, but it also involved the risk of loss by theft, robbery and
other accidents. Thus, people were in need of a place where money could be saved safely and
would be available when required. Banks are such places where people can deposit their
savings with the assurance that they will be able to with draw money from the deposits
whenever required. Bank is a lawful organization which accepts deposits that can be
withdrawn on demand. It also tends money to individuals and business houses that need it.
DEFINITIONS OF BANK
1. Indian Banking Companies Act - “Banking Company is one which transacts the business of
banking which means the accepting for the purpose of lending or investment of deposits money
from the public repayable on demand or otherwise and withdrawable by cheque, draft, order or
otherwise”.
2. Dictionary Meaning of the Word ‘Bank’ -The oxford dictionary defines a bank as “an
establishment
for custody of money received from or on behalf of its customers. It’s essential duty is to pay
their drafts on it. It’s profits arises from the use of the money left employed by them”.
3. The Webster’s Dictionary Defines a bank as “an institution which trades in money,
establishment for the deposit, custody and issue of money, as also for making loans and
discounts and facilitating the transmission of remittances from one place to another”.
4. According to Prof. Kinley, “A bank is an establishment which makes to individuals such
advances of money as may be required and safely made, and to which individuals entrust
money when it required by them for use”.
The above definitions of bank reveal that bank is an Business institution which deal in money
and use of money. Thus a proper and scientific definition of the bank should include various
functions performed by a bank in a proper manner. We can say that any person, institution,
company or enterprise can be a bank. The business of a bank consists of acceptance of
deposits, withdrawals of deposits, Making loans and advances, investments on account of
which credit is exacted by banks.

NEED OF THE BANKS

Before the establishment of banks, the financial activities were handled by money lenders and
individuals. At that time the interest rates were very high. Again there were no security of
public savings and no uniformity regarding loans. So as to overcome such problems the
organized banking sector was established, which was fully regulated by the government. The
organized banking sector works within the financial system to provide loans, accept deposits
and provide other services to their customers. The following functions of the bank explain the
need of the bank and its importance:
• To provide the security to the savings of customers.
• To control the supply of money and credit
• To encourage public confidence in the working of the financial system, increase savings
speedily and efficiently.
• To avoid focus of financial powers in the hands of a few individuals and institutions.
• To set equal norms and conditions (i.e. rate of interest, period of lending etc) to all types of
customers.

HISTORY OF INDIAN BANKING SYSTEM

The first bank in India, called The General Bank of India was established in the year 1786. The
East India Company established The Bank of Bengal/Calcutta (1809), Bank of Bombay (1840)
and Bank of Madras (1843). The next bank was Bank of Hindustan which was established in
1870. These three individual units (Bank of Calcutta, Bank of Bombay, and Bank of Madras)
were called as Presidency Banks. Allahabad Bank which was established in 1865, was for the
first time completely run by Indians. Punjab National Bank Ltd. was set up in 1894 with head
quarters at Lahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank of
Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. In 1921, all presidency
banks were amalgamated to form the Imperial Bank of India which was run by European
Shareholders. After that the Reserve Bank of India was established in April 1935.
At the time of first phase the growth of banking sector was very slow. Between 1913 and 1948
there were approximately 1100 small banks in India. 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 Banking Regulation Act 1949 as per amending Act of
1965 (Act No.23 of 1965). Reserve Bank of India was vested with extensive powers for the
supervision of banking in India as a Central Banking Authority. After independence,
Government has taken most important steps in regard of Indian Banking Sector reforms. In
1955, the Imperial Bank of India was nationalized and was given the name "State Bank of
India", to act as the principal agent of RBI and to handle banking transactions all over the
country. It was established under State Bank of India Act, 1955. Seven banks forming
subsidiary of State Bank of India was nationalized in 1960. On 19 th July, 1969, major process
of nationalization was carried out. At the same time 14 major Indian commercial banks of the
country were nationalized. In 1980, another six banks were nationalized, and thus raising the
number of nationalized banks to 20. Seven more banks were nationalized with deposits over
200 Crores. Till the year 1980 approximately 80% of the banking segment in India was under
government’s ownership. On the suggestions of Narsimhan Committee, the Banking
Regulation Act was amended in 1993 and thus the gates for the new private sector banks were
opened.

The following are the major steps taken by the Government of India to Regulate Banking
institutions in the country:-
1949 : Enactment of Banking Regulation Act.
1955 : Nationalisation of State Bank of India.
1959 : Nationalization of SBI subsidiaries.
1961 : Insurance cover extended to deposits.
1969 : Nationalisation of 14 major Banks.
1971 : Creation of credit guarantee corporation.
1975 : Creation of regional rural banks.
1980 : Nationalisation of seven banks with deposits over 200 Crores.

OBJECTIVES OF THE STUDY

 To study broad outline of management of credit, market and operational risks

associated with banking sector.
 To understand the importance of banking sector.
 To study the Indian bank scenario and its problem.
 Long Term and Short Term Finances.
 To study the role of bank in Indian Market.
 Different types of services provided by the banks.
 To study various bank, Corporate and Commercial.
 To study the Indian bank scenario and its problem.
 Though the Indian Banking System is very wide and elaborated, still the project

covers whole subject in concise manner.

  The study aims at learning the techniques involved to manage the various types

of Banks, various methodologies undertaken.

 To offer suggestions based upon the findings.

SCOPE OF THE STUDY

 A healthy banking system is essential for any economy striving to achieve
good growth and yet remain stable in an increasingly global business
environment. The Indian banking system, with one of the largest banking
networks in the world, has witnessed a series of reforms over the past few
years like the deregulation of interest rates, dilution of the government stake in
public sector banks (PSBs), and the increased participation of private sector
banks. The growth of the retail financial services sector has been a key
development on the market front. Indian banks (both public and private) have
not only been keen to tap the domestic market but also to compete in the global
market place.
 Studying the increasing business scope of the bank.

 Market segmentation to find the potential customers for the bank.

 Customers’ perception on the various products of the bank.
 The corporate sector has stepped up its demand for credit to fund its expansion
plans; there has also been a growth in retail banking.
 The report seeks to present a comprehensive picture of the various types of
bank. The banks can be broadly classified into two categories:-
Nationalise Bank
Private Bank
 Within each of these broad groups, an attempt has been made to cover as
comprehensively as possible, under the various sub-groups.

LIMITATION OF THE STUDY: Every work has its own limitation. Limitations
are extent to which the process should not exceed. Limitations of this project are:-
1. The project was constrained by time limit of two months.
2. The major limitation of this study shall be data availability as the data is
proprietary and not readily shared for dissemination.
3. Due to the ongoing process of globalization and increasing competition, no one
model or method will suffice over a long period of time and constant up gradation
will be required. As such the project can be considered as an overview of the
various banks prevailing in Punjab National Bank and in the Banking Industry.
4. Each bank, in conforming to the RBI guidelines, may develop its own methods
for measuring and managing risk.

5. The project study is restricted to banking sector used in India only.

6. The conclusion made is based on a sample study and does not apply to all the
Individuals.
7. In India the banks are being segregated in different groups. Each group has their
own benefits and limitations in operating in India.
8. All banks are not included.
PROBLEMS: -- The corporate sector has stepped up its demand for credit to fund its
expansion plans, there has also been a growth in retail banking. However, even as the
opportunities increase, there are some issues and challenges that Indian banks will have
to contend with if they are to emerge successful in the medium to long term.
RESEARCH METHODOLOGY:-
The first stage included the introduction of Indian Banks and how they work in India. I
choose five criteria Growth, Credit quality, Strength, Profitability, Efficiency /
Profitability. The next stage involved determining the objectives of the study, drafting a
questionnaire will be designed keeping in mind the target audience and objectives of the
study. It will non-disguised in nature and will include a few open-ended questions.
DATA COLLECTIONS
The data from such organization has also been collected.
Secondary data
The Preparation of the project report also required data from various journals,
newspapers ( like The Economic Times, Times of India etc.) books ( like Working
 Capital Management written by Sarbesh Mishra and Financial Service written by M Y
Khan 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 institution may be divided into following types:

(Central Bank)
[RBI, in India]
Commercial Banks
[Public Sector Banks]
Foreign Exchange Banks
[Private Sector Banks]
[Foreign Banks]

Export Import Banks Development Banks

Co-operative Banks
(i)
Primary credit societies
Saving Banks (ii) Central
Co-operativeBanks
(iii) State Co-
operativeBanks

Specialised Banks
Rural Banking
(NABAD, SIDBI)

Indigenous Bankers

• CENTRAL BANK
 A central bank functions as the apex controlling institution in the banking and financial
system of the country. It functions as the controller of credit, banker’s bank and also enjoys
the monopoly of issuing currency on behalf of the government. A central bank is usually
control and quite often owned, by the government of a country. The Reserve Bank of India
(RBI) is such a bank within an India.
• COMMERCIAL BANKS
It operates for profit. It accepts deposits from the general public and extends loans to the
households, the firms and the government. The essential characteristics of commercial
banking are as follows:
- Acceptance of deposits from public
- For the purpose of lending or investment
- Repayable on demand or lending or investment.
- Withdrawal by means of an instrument, whether a cheque or otherwise.
Another distinguish feature of commercial bank is that a large part of their deposits are
demand deposits withdrawable and transferable by cheque.
• DEVELOPMENT BANKS
It is considered as a hybrid institution which combines in itself the functions of a finance
corporation and a development corporation. They also act as a catalytic agent in promoting
balanced and viable development by assuming promotional role of discovering project
ideas, undertaking feasibility studies and also provide technical, financial and managerial
assistance for the implementation of project. In India ‘Industrial Development Bank on
India’ (IDBI) is the unique example of development bank. It has been designated as the
principal institution of the country for co-ordinating the working of the institutions engaged
in financing, promoting or development of industry.
• CO-OPERATIVE BANKS
The main business of co-operative banks is to provide finance to agriculture. They aim at
developing a system of credit. Agriculture finance is a special field. The co-operative banks
play a useful role in providing cheap exit facilities to the farmers. In India there are three
wings of co-operative credit system namely –
Short term,
Medium-term,
 Long term credit.
The former has a three tier structure consisting of state co-operative banks at the state level.
At the intermediate level (district level) these are central co-operative banks, which are
generally established for each district. At the base of the pyramid there are primary
agricultural societies at the village level. The long term exit is provided by the central land
development Bank established at the state level. Initially, these banks used to advance loans
on mortgage of land for the purpose of securing repayment of loans.
• SPECIALISED BANKS
These banks are established and controlled under the special act of parliament. These banks
have got the special status. One of the major bank is ‘National Bank for Agricultural and
Rural development’ (NABARD) established in 1982, as an apex institution in the field of
agricultural and other economic activities in rural areas. In 1990 a special bank named small
industries development Bank of India (SIDBI) was established. It was the subsidiary of
Industrial development Bank of India. This bank was established for providing loan
facilities, discounting and rediscounting of bills, direct assistance and leasing facility.
• INDIGENOUS BANKERS
That unorganised unit which provides productive, unproductive, long term, medium term
and short term loan at the higher interest rate are known as indigenous bankers. These banks
can be found everywhere in cities, towns, mandis and villages.
• RURAL BANKING
A set of financial institution engaged in financing of rural sector is termed as ‘Rural
Banking’. The polices of financing of these banks have been designed in such a way so that
these institution can play catalyst role in the process of rural development.
• SAVING BANKS
These banks perform the useful services of collecting small savings commercial banks also
run “saving bank” to mobilise the savings of men of small means. Different countries have
different types of savings bank viz. Mutual savings bank, Post office saving, commercial
saving banks etc.
• EXPORT - IMPORT BANK
 These banks have been established for the purpose of financing foreign trade. They
concentrate their working on medium and long-term financing. The Export-Import Bank of
India (EXIM Bank) was established on January 1, 1982 as a statutory corporation wholly
owned by the central government.
• FOREIGN EXCHANGE BANKS
These banks finance mostly to the foreign trade of a country. Their main function is to
discount, accept and collect foreign bulls of exchange. They also buy and self foreign
currencies and help businessmen to convert their money into any foreign currency they
need. Over a dozen foreign exchange banks branches are working in India have their head
offices in foreign countries.

TYPES OF BANKING
Banking is described as the business carried on by an individual at a bank. Today, several
forms of banking exist, giving consumers a choice in the way they manage their money most
people do a combination of at least two banking types. However, the type of banking a
consumer uses normally based on convenience.
These are different types of banking through which consumer can attach to it-
• WALK-IN-BANKING
It is still a popular type of banking. As, in the past, it still involves bank tellers and
specialized bank officers. Consumers must walk into a bank to use this service normally, in
order to withdraw money or deposit it, a person must fill out a slip of paper with the account
and specific monetary amount and show a form of identification to a bank letter. The
advantage of walk in Banking is the face to face connection between the banker and a letter.
Also unlike drive thru and ATM banking, a person can apply for a loan and invest money
during a walk in.
• DRIVE THRU BANKING
It is probably the least popular form of banking today, but is still used enough by consumers
to create a need for it. It allows consumers to stay in their while and drive up to a machine
equipped with container, chute and intercom. This machine is connected to a bank and is run
by one or two bank letters. A person can withdraw or deposit money at a drive thru. He must
 fill out a slip with his account and specific monetary amount and put it in the container. The
container travels through the chute to the bank letter, who will complete the banker’s
request. This is where the intercom comes into play. The bank teller and banker use it to
communicate and discuss the specific banking request.
• ATM BANKING
It is very popular because it gives a person 24 hour access to his bank account. Walk in and
drive thru banking does not offer this perk. In order to use an ATM, a person must have an
ATM card with personal identification number (PIN) and access to an ATM machine. Any
ATM machine can be used, but charges apply if the ATM machine is not affiliated with the
bank listed on the ATM card. By sliding an ATM card into an ATM machine, it is activated
and then through touching buttons on the machine, a consumer is able to withdraw or
deposit money.
• ONLINE BANKING
It allows a person to get on the internet and sign into their bank. This process is achieved
with the use of a PIN, different from the one used for the ATM card. By going website of a
bank and entering it, a consumer can get into his account, withdraw money, deposit money,
pay bills, request loans and invest money. Online banking is growing in popularity because
of its convenience. These different types of banking give a consumer the power of choice
and also give them a comfortable banking system that gives them a convenient choice.
 BANKING SYSTEM IN INDIA

NATIONALISATION
By the 1960s, the Indian banking industry has become an important tool to facilitate the
development of the Indian economy. At the same time, it has emerged as a large employer, and
a debate has ensured about the possibility to nationalise the banking industry. Indira Gandhi,
the-then Prime Minister of India expressed the intention of the Government of India (GOI) in
the annual conference of the All India Congress Meeting in a paper entitled "Stray thoughts
on Bank Nationalisation". The paper was received with positive enthusiasm. Thereafter, her
move was swift and sudden, and the GOI issued an ordinance and nationalised the 14 largest
commercial banks with effect from the midnight of July 19, 1969. Jayaprakash Narayan, a
national leader of India, described the step as a "Masterstroke of political sagacity" Within
two weeks of the issue of the ordinance, the Parliament passed the Banking Companies
(Acquisition and Transfer of Undertaking) Bill, and it received the presidential approval on 9
August, 1969.
A second step of nationalisation of 6 more commercial banks followed in 1980. The stated
reason for the nationalisation was to give the government more control of credit delivery. With
the second step of nationalisation, the GOI controlled around 91% of the banking business in
India. Later on, in the year 1993, the government merged New Bank of India with Punjab
National Bank. It was the only merger between nationalised banks and resulted in the reduction
of the number of nationalised banks from 20 to 19. After this, until the 1990s, the nationalised
banks grew at a pace of around 4%, closer to the average growth rate of the Indian economy.
The nationalised banks were credited by some; including Home minister P. Chidambaram, to
have helped the Indian economy withstand the global financial crisis of 2007-2009.
LIBERALISATION
In the early 1990s, the then Narsimha Rao government embarked on a policy of liberalisation,
licensing a small number of private banks. These came to be known as New Generation tech-
savvy banks, and included Global Trust Bank (the first of such new generation banks to be set
up), which later amalgamated with Oriental Bank of Commerce, Axis Bank(earlier as UTI
Bank), ICICI Bank and HDFC Bank. This move along with the rapid growth in the economy of
India revolutionized the banking sector in India which has seen rapid growth with strong
contribution from all the three sectors of banks, namely, government banks, private banks and
foreign banks. The next stage for the Indian banking has been setup with the proposed
relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in banks
may be given voting rights which could exceed the present cap of 10%, at present it has gone
up to 49% with some restrictions.
The new policy shook the banking sector in India completely. Bankers, till this time, were used
to the 4-6-4 method (Borrow at 4%; Lend at 6%; Go home at 4) of functioning. The new wave
ushered in a modern outlook and tech-savvy methods of working for the traditional banks. All
this led to the retail boom in India. People not just demanded more from their banks but also
received more. Currently (2007), banking in India is generally fairly mature in terms of supply,
product range and reach-even though reach in rural India still remains a challenge for the
private sector and foreign banks. In terms of quality of assets and capital adequacy, Indian
banks are considered to have clean, strong and transparent balance sheets as compared to other
banks in comparable economies in its region. The Reserve Bank of India is an autonomous
body, with minimal pressure from the government. The stated policy of the Bank on the Indian
Rupee is to manage volatility but without any fixed exchange rate-and this has mostly been
true. With the growth in the Indian economy expected to be strong for quite some time-
especially in its services sector-the demand for banking services, especially retail banking,
mortgages and investment services are expected to be strong.
In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in
Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an investor has been
allowed to hold more than 5% in a private sector bank since the RBI announced norms in 2005
that any stake exceeding 5% in the private sector banks would need to be voted by them. In
recent years critics have charged that the non-government owned banks are too aggressive in
their loan recovery efforts in connection with housing, vehicle and personal loans. There are
press reports that the banks' loan recovery efforts have driven defaulting borrowers to suicide.

GOVERNMENT POLICY ON BANKING INDUSTRY

Banks operating in most of the countries must contend with heavy regulations, rules enforced
by Federal and State agencies to govern their operations, service offerings, and the manner in
which they grow and expand their facilities to better serve the public. A banker works within
the financial system to provide loans, accept deposits, and provide other services to their
customers. They must do so within a climate of extensive regulation, designed primarily to
protect the public interests.
The main reasons why the banks are heavily regulated are as follows:
• To protect the safety of the public’s savings.
• To control the supply of money and credit in order to achieve a nation’s broad economic
goal.
• To ensure equal opportunity and fairness in the public’s access to credit and other vital
financial services.
• To promote public confidence in the financial system, so that savings are made speedily and
efficiently.
• To avoid concentrations of financial power in the hands of a few individuals and
institutions.
• Provide the Government with credit, tax revenues and other services.
• To help sectors of the economy that they have special credit needs for eg. Housing, small
business and agricultural loans etc.
LAW OF BANKING
Banking law is based on a contractual analysis of the relationship between the bank and
customer—defined as any entity for which the bank agrees to conduct an account.

The law implies rights and obligations into this relationship as follows:
• The bank account balance is the financial position between the bank and the customer: when
the account is in credit, the bank owes the balance to the customer; when the account is
overdrawn, the customer owes the balance to the bank.
• The bank agrees to pay the customer's cheques up to the amount standing to the credit of the
customer's account, plus any agreed overdraft limit.
• The bank may not pay from the customer's account without a mandate from the customer,
e.g. cheques drawn by the customer.
• The bank agrees to promptly collect the cheques deposited to the customer's account as the
customer's agent, and to credit the proceeds to the customer's account.
• The bank has a right to combine the customer's accounts, since each account is just an
aspect of the same credit relationship.
• The bank has a lien on cheques deposited to the customer's account, to the extent that the
customer is indebted to the bank.
• The bank must not disclose details of transactions through the customer's account—unless
the customer consents, there is a public duty to disclose, the bank's interests require it, or the
law demands it.
• The bank must not close a customer's account without reasonable notice, since cheques are
outstanding in the ordinary course of business for several days.

These implied contractual terms may be modified by express agreement between the customer
and the bank. The statutes and regulations in force within a particular jurisdiction may also
modify the above terms and/or create new rights, obligations or limitations relevant to the
bank-customer relationship.

REGULATIONS FOR INDIAN BANKS

Currently in most jurisdictions commercial banks are regulated by government entities and
require a special bank license to operate. Usually the definition of the business of banking for
the purposes of regulation is extended to include acceptance of deposits, even if they are not
repayable to the customer's order—although money lending, by itself, is generally not included
in the definition.
Unlike most other regulated industries, the regulator is typically also a participant in the
market, i.e. a government-owned (central) bank. Central banks also typically have a monopoly
on the business of issuing banknotes. However, in some countries this is not the case. In UK,
for example, the Financial Services Authority licenses banks, and some commercial banks
(such as the Bank of Scotland) issue their own banknotes in addition to those issued by the
Bank of England, the UK government's central bank.
Some types of financial institutions, such as building societies and credit unions, may be partly
or wholly exempted from bank license requirements, and therefore regulated under separate
rules. The requirements for the issue of a bank license vary between jurisdictions but typically
include:
• Minimum capital
• Minimum capital ratio
• 'Fit and Proper' requirements for the bank's controllers, owners, directors, and/or senior
officers
• Approval of the bank's business plan as being sufficiently prudent and plausible.

CLASSIFICATION OF BANKING INDUSTRY IN INDIA

Indian banking industry has been divided into two parts, organized and unorganized sectors.
The organized sector consists of Reserve Bank of India, Commercial Banks and Co-operative
Banks, and Specialized Financial Institutions (IDBI, ICICI, IFC etc). The unorganized sector,
which is not homogeneous, is largely made up of money lenders and indigenous bankers.

An outline of the Indian Banking structure may be presented as follows:-

1. Reserve banks of India.

2. Indian Scheduled Commercial Banks.
a) State Bank of India and its associate banks.
b) Twenty nationalized banks.
c) Regional rural banks.
d) Other scheduled commercial banks.
3. Foreign Banks
4. Non-scheduled banks.
5. Co-operative banks.
RESERVE BANK OF INDIA
The reserve bank of India is a central bank and was established in April 1, 1935 in accordance
with the provisions of reserve bank of India act 1934. The central office of RBI is located at
Mumbai since inception. Though originally the reserve bank of India was privately owned,
since nationalization in 1949, RBI is fully owned by the Government of India. It was
inaugurated with share capital of Rs. 5 Crores divided into shares of Rs. 100 each fully paid up.
RBI is governed by a central board (headed by a governor) appointed by the central
government of India. RBI has 22 regional offices across India. The reserve bank of India was
nationalized in the year 1949. The general superintendence and direction of the bank is
entrusted to central board of directors of 20 members, the Governor and four deputy
Governors, one Governmental official from the ministry of Finance, ten nominated directors by
the government to give representation to important elements in the economic life of the
country, and the four nominated director by the Central Government to represent the four local
boards with the headquarters at Mumbai, Kolkata, Chennai and New Delhi. Local Board
consists of five members each central government appointed for a term of four years to
represent territorial and economic interests and the interests of cooperative and indigenous
banks.
The RBI Act 1934 was commenced on April 1, 1935. The Act, 1934 provides the statutory
basis of the functioning of the bank. The bank was constituted for the need of following:
- To regulate the issues of banknotes.
- To maintain reserves with a view to securing monetary stability
- To operate the credit and currency system of the country to its advantage.

Functions of RBI as a central bank of India are explained briefly as follows:

BANK OF ISSUE: The RBI formulates, implements, and monitors the monitory policy. Its
main objective is maintaining price stability and ensuring adequate flow of credit to productive
sector.
REGULATOR-SUPERVISOR OF THE FINANCIAL SYSTEM: RBI prescribes
broad parameters of banking operations within which the country’s banking and financial
system functions. Their main objective is to maintain public confidence in the system, protect
depositor’s interest and provide cost effective banking services to the public.
MANAGER OF EXCHANGE CONTROL: The manager of exchange control
department manages the foreign exchange, according to the foreign exchange management act,
1999. The manager’s main objective is to facilitate external trade and payment and promote
orderly development and maintenance of foreign exchange market in India.
ISSUER OF CURRENCY: A person who works as an issuer, issues and exchanges or
destroys the currency and coins that are not fit for circulation. His main objective is to give the
public adequate quantity of supplies of currency notes and coins and in good quality.
DEVELOPMENTAL ROLE: The RBI performs the wide range of promotional functions
to support national objectives such as contests, coupons maintaining good public relations and
many more.
RELATED FUNCTIONS: There are also some of the related functions to the above
mentioned main functions. They are such as, banker to the government, banker to banks etc
• Banker to government performs merchant banking function for the central and the state
governments; also acts as their banker.
• Banker to banks maintains banking accounts to all scheduled banks.
CONTROLLER OF CREDIT: RBI performs the following tasks:
• It holds the cash reserves of all the scheduled banks.
• It controls the credit operations of banks through quantitative and qualitative controls.
• It controls the banking system through the system of licensing, inspection and calling for
information.
• It acts as the lender of the last resort by providing rediscount facilities to scheduled banks.
SUPERVISORY FUNCTIONS: In addition to its traditional central banking functions the
Reserve Bank performs certain non-monetary functions of the nature of supervision of banks
and promotion of sound banking in India. The Reserve Bank Act 1934 and the banking
regulation act 1949 have given the RBI wide powers of supervision and control over
commercial and co-operative banks, relating to licensing and establishments, branch
expansion, liquidity of their assets, management and methods of working, amalgamation,
reconstruction and liquidation. The RBI is authorized to carry out periodical inspections of the
banks and to call for returns and necessary information from them. The nationalisation of 14
major Indian scheduled banks in July 1969 has imposed new responsibilities on the RBI for
directing the growth of banking and credit policies towards more rapid development of the
economy and realisation of certain desired social objectives. The supervisory functions of the
RBI have helped a great deal in improving the standard of banking in India to develop on
sound lines and to improve the methods of their operation.
PROMOTIONAL FUNCTIONS: With economic growth assuming a new urgency since
independence, the range of the Reserve Bank’s functions has steadily widened. The bank now
performs a variety of developmental and promotional functions, which, at one time, were
regarded as outside the normal scope of central banking. The Reserve bank was asked to
promote banking habit, extend banking facilities to rural and semi-urban areas, and establish
and promote new specialized financing agencies.

INDIAN SCHEDULED COMMERCIAL BANKS

The commercial banking structure in India consists of scheduled commercial banks, and
unscheduled banks.
SCHEDULED BANKS: Scheduled Banks in India constitute those banks which have been
included in the second schedule of RBI act 1934. RBI in turn includes only those banks in this
schedule which satisfy the criteria laid down vide section 42(6a) of the Act. “Scheduled banks
in India” means the State Bank of India constituted under the State Bank of India Act, 1955 (23
of 1955), a subsidiary bank as defined in the s State Bank of India (subsidiary banks) Act, 1959
(38 of 1959), a corresponding new bank constituted under section 3 of the Banking companies
(Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank being a
bank included in the Second Schedule to the Reserve bank of India Act, 1934 (2 of 1934), but
does not include a co-operative bank”. For the purpose of assessment of performance of banks,
the Reserve Bank of India categories those banks as public sector banks, old private sector
banks, new private sector banks and foreign banks, i.e. private sector, public sector, and
foreign banks come under the umbrella of scheduled commercial banks.
REGIONAL RURAL BANK: The government of India set up Regional Rural Bank (RRBs)
on October 2, 1975 [10]. The banks provide credit to the weaker sections of the rural areas,
particularly the small and marginal farmers, agricultural laborers, and small entrepreneurs.
Initially, five RRBs were set up on October 2, 1975 which was sponsored by Syndicate Bank,
State Bank of India, Punjab National Bank, United Commercial Bank and United Bank of
India. The total authorized capital was fixed at Rs. 1 Crore which has since been raised to Rs. 5
Crores. There are several concessions enjoyed by the RRBs by Reserve Bank of India such as
lower interest rates and refinancing facilities from NABARD like lower cash ratio, lower
statutory liquidity ratio, lower rate of interest on loans taken from sponsoring banks,
managerial and staff assistance from the sponsoring bank and reimbursement of the expenses
on staff training. The RRBs are under the control of NABARD. NABARD has the
responsibility of laying down the policies for the RRBs, to oversee their operations, provide
refinance facilities, to monitor their performance and to attend their problems.
UNSCHEDULED BANKS: “Unscheduled Bank in India” means a banking company as
define in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949), which is not
a scheduled bank”.

NABARD
NABARD is an apex development bank with an authorization for facilitating credit flow for
promotion and development of agriculture, small-scale industries, cottage and village
industries, handicrafts and other rural crafts. It also has the mandate to support all other allied
economic activities in rural areas, promote integrated and sustainable rural development and
secure prosperity of rural areas. In discharging its role as a facilitator for rural prosperity,
NABARD is entrusted with:
1. Providing refinance to lending institutions in rural areas
2. Bringing about or promoting institutions development and
3. Evaluating, monitoring and inspecting the client banks

Besides this fundamental role, NABARD also:

• Act as a coordinator in the operations of rural credit institutions
• To help sectors of the economy that they have special credit needs for eg. Housing, small
business and agricultural loans etc.
CO-OPERATIVE BANKS
It operates for profit. It accepts deposits from the general public and extends loans to the
households, the firms and the government. The essential characteristics of commercial banking
are as follows:
- Acceptance of deposits from public
- For the purpose of lending or investment
- Repayable on demand or lending or investment.
- Withdrawal by means of an instrument, whether a cheque or otherwise.
Another distinguish feature of commercial bank is that a large part of their deposits are demand
deposits withdrawable and transferable by cheque.

SERVICES PROVIDED BY BANKING ORGANIZATIONS

Banking Regulation Act in India, 1949 defines banking as “Accepting” for the purpose of
lending or investment of deposits of money from the public, repayable on demand and with
draw able by cheques, drafts, orders etc. as per the above definition a bank essentially performs
the following functions:-
• Accepting Deposits or savings functions from customers or public by providing bank
account, current account, fixed deposit account, recurring accounts etc.
• The payment transactions like lending money to the public. Bank provides an effective
credit delivery system for loanable transactions.
• Provide the facility of transferring of money from one place to another place. For
performing this operation, bank issues demand drafts, banker’s cheques, money orders etc.
for transferring the money. Bank also provides the facility of Telegraphic transfer or tele-
cash orders for quick transfer of money.
• A bank performs a trustworthy business for various purposes.
• A bank also provides the safe custody facility to the money and valuables of the general
public. Bank offers various types of deposit schemes for security of money. For keeping
valuables bank provides locker facility. The lockers are small compartments with dual
locking system built into strong cupboards. These are stored in the bank’s strong room and
are fully secured.
• Banks act on behalf of the Govt. to accept its tax and non-tax receipt. Most of the
government disbursements like pension payments and tax refunds also take place through
 banks. There are several types of banks, which differ in the number of services they provide
and the clientele (Customers) they serve. Although some of the differences between these
types of banks have lessened as they have begun to expand the range of products and
services they offer, there are still key distinguishing traits. These banks are as follows:

COMMERCIAL BANKS, which dominate this industry, offer a full range of services for
individuals, businesses, and governments. These banks come in a wide range of sizes, from
large global banks to regional and community banks.
GLOBAL BANKS are involved in international lending and foreign currency trading, in
addition to the more typical banking services.
REGIONAL BANKS have numerous branches and automated teller machine (ATM)
locations throughout a multi-state area that provide banking services to individuals. Banks have
become more oriented toward marketing and sales. As a result, employees need to know about
all types of products and services offered by banks.
COMMUNITY BANKS are based locally and offer more personal attention, which many
individuals and small businesses prefer. In recent years, online banks—which provide all
services entirely over the Internet—have entered the market, with some success. However,
many traditional banks have also expanded to offer online banking, and some formerly
Internet-only banks are opting to open branches.
SAVINGS BANKS AND SAVINGS AND LOAN ASSOCIATIONS, sometimes
called thrift institutions, are the second largest group of depository institutions. They were first
established as community-based institutions to finance mortgages for people to buy homes and
still cater mostly to the savings and lending needs of individuals.
CREDIT UNIONS are another kind of depository institution. Most credit unions are formed
by people with a common bond, such as those who work for the same company or belong to
the same labour union or church. Members pool their savings and, when they need money, they
may borrow from the credit union, often at a lower interest rate than that demanded by other
financial institutions.
FEDERAL RESERVE BANKS are Government agencies that perform many financial
services for the Government. Their chief responsibilities are to regulate the banking industry
and to help implement our Nation’s monetary policy so our economy can run more efficiently
by controlling the Nation’s money supply—the total quantity of money in the country,
including cash and bank deposits. For example, during slower periods of economic activity, the
Federal Reserve may purchase government securities from commercial banks, giving them
more money to lend, thus expanding the economy. Federal Reserve banks also perform a
variety of services for other banks. For example, they may make emergency loans to banks that
are short of cash, and clear checks that are drawn and paid out by different banks.
THE MONEY BANKS lend, comes primarily from deposits in checking and savings
accounts, certificates of deposit, money market accounts, and other deposit accounts that
consumers and businesses set up with the bank. These deposits often earn interest for their
owners, and accounts that offer checking, provide owners with an easy method for making
payments safely without using cash. Deposits in many banks are insured by the Federal
Deposit Insurance Corporation, which guarantees that depositors will get their money back, up
to a stated limit, if a bank should fail.