Bank is derived from French word “banco” meaning of bench for money exchange table. Bank is a financial institution that provides banking and other financial services to their customers such as accepting deposits, lending loans, money transfers and selling third party products like insurance, mutual fund and portfolio Management
Explain working of a bank. Explain how opening of a bank account has an effect on economic growth and welfare. (Important question in exams)
Types of banks
On the basis of ownership
Public sector bank
- Majority of shares is held by the government
Private sector bank
- owned by a group of private shareholders
Foreign bank
- has headquarter in a foreign country but operates in India as a private entity
- These banks are under the obligation to follow the regulations of its home country as well as the country in which they are operating
Cooperative Bank
- these are registered under the cooperative societies act 1912 and they are run by an elected managing committee
- These work on non profit basis and mainly serve entrepreneurs, small businesses, self employment in urban area
- For ex: Central cooperative, state cooperative banks
On the basis of function
Payment Banks
- these are relatively new model of bank in Indian banking industry
- It doesn’t provide loans or advances and is allowed to accept restricted deposit
- The amount is currently limited to 1 lakh per customer
- They also offer services like ATM cards, debit cards, net banking and mobile banking
Commercial banks
- these are regulated under the banking regulation act 1949 and aim is to make profit
- The primary function includes accepting deposits and granting loans
Foreign exchange banks
- these banks are incorporated outside the country but carry out business in India
- They provide forex subject to the rules and regulations of the country in which they are operating
- They also provide finance to exporters and letter of credit to importers
Investment banks
- these are specialised in assisting corporates today’s finance for activities such as mergers and acquisitions, raising funds through IPO, underwriting, financial advisory, research etc.
- Ex: JP Morgan Chase, Goldman Sachs, Citigroup, Morgan Stanley etc
Small financial banks
- the primary objective is providing supply of credit to a small business units, farmers, micro and small industries, unorganised sector.
- These perform basic banking activities.
- Ex: ujjaval small finance bank, jana small finance bank etc
Effect of commercial banks
- Habit of saving increases, mobilisation of saving increases
- Money provided to producers
- Investment increases
- Employment increases,
- Standard of living increases
- Demand increases
- Allocation of funds
- Helping in social welfare
- Keeping money safe
- Direct employment to bankers
- Facilitates business
- Help small scale industries
- Capital formation increases
- Economic growth
Facilities provided by banks
- Keeps money safe
- Increases savings
- Cheque facility
- Internet banking
- Lockers
- Helps in trade
Importance of banks
- Capital formation (explain)
- Improve standard of living
- Economic development
- Aid to government (assists)
- Customer service
- Transfer of money
- Decreases use of money
- Services to businesses
- Mobilisation of savings
- Benefits to rural economy
- Development of credit policy
Function of banks
- Accepting deposits
- Landing facility
- Payment and withdrawal facility
- Fund transfer
- Financial intermediation
- Risk management
- Economic growth
Role of banks
- Encourages saving
- Makes funds available
- Acts as an intermediate
- Facilitates business transactions
- Provides loans and advances
- Facilitates import export transactions
- Helps in national development
- Provides credit to farmers, small scale industry and self employed people
- Increases standard of living
- Financial assistance to industries
- Helps in implementing monetary policy
- Balance development
- Foreign currency loans
- Promotion of new entrepreneurs
- Assistance to agricultural sector
History of Indian banking
Journey of Indian banking can be segregated in four phases
- Phase 1 : early phase (1786 to 1969)
- Phase 2 : nationalisation (1969 to 1991)
- Phase 3 : banking sector reforms (1991 to 2002)
- Phase 4 : new challenges (2002 to date)
Phase 1
- Banking in India originated in the last decades of the 18th century.
- The first banks were “the general Bank of India” which started in 1786 and ” the bank of Hindustan”. Both of which are now de functional.
- Bank of Bengal (1809), Bank of Bombay (1840) and bank of Madras (1843) were the 3 presidency banks.
- These three merged in 1921 to form imperial Bank of India which upon independence became SBI.
- Indian merchants in Calcutta established “the union Bank” in 1839 but it failed in 1848 as a consequence of the economic crisis of 1848-49.
- “Allahabad Bank” established in 1865 and still functioning is the oldest joint stock Bank in India.
- Punjab National Bank, established in Lahore in 1895, which has survived to the present is now one of the largest banks in India.
- Reserve Bank of India came in 1935. It was nationalised on January 1st, 1949.
- By 1960s, the Indian banking industry had become an important tool to facilitate the development of the Indian economy. (Explain)
Phase 2
- Government of India issued an ordinance and nationalized the 14 largest commercial bank with effect from midnight of July 19, 1969.
- Second dose of nationalisation of 6 more commercial banks followed in 1980. The stated reason for the national education was to give the government mode control on credit delivery.
- With the second dose of nationalisation, Government of India controlled around 91% of banking business of India
Phase 3
- In the early 1990s, the then Narsimha Rao government embarked to a policy of liberalisation, licensing a small number of private banks.
- This came to be known as “new generation tech savvy banks” and included “Global trust Bank”, which later amalgamated with “Oriental Bank of commerce, Axis Bank, ICICI bank and HDFC”.
- This move along with the rapid growth in the economy of India revitalized the banking sector in India, which has seen rapid growth with strong contribution from all the three sectors of banks i.e Government, Private, Foreign Banks
Phase 4
- Banking industry is facing intense competition from NBFCs and Foreign Banks.
- The worldwide revolution in information and communication technology has opened new avenues like 24 hour banking, telebanking, interest banking, e-banking.
- The steps have been taken for computerisation of banking sector.
Conclusion
It has helped effectively in
- Asset liability management
- Relationship banking
- Human resource development
- Corporate governance
- Accountability and transparency