UNIT I INTRODUCTION

• “Banking can be defined as the business activity of accepting and safeguarding

money owned by other individuals and entities and then lending out this money in
order to earn a profit.”
• Banking is the business of protecting money for others. Banks lend this money,
generating interest that creates profits for the bank and its customers.
• A bank is a financial institution licensed to accept deposits and make loans. But
they may also perform other financial services.
• The term “bank” can refer to many different types of financial institutions —
including bank and trust companies, savings and loan associations, credit unions or
any other type of institution that accepts deposits.
 Types of Banks
There are several types of banks, typically grouped into a category based on the type of business they perform. Banks
in a certain category offer similar services. Some banks may focus on consumers while others focus on investments,
corporations or other sectors of financial services. Whether you are looking to manage your personal finances or
grow your business, here is a list of common types of banks unique to every need.

• Retail or Consumer Banks Retail banks — also known as consumer banks — offer banking services to the general
public. These include checking, savings and retirement accounts along with consumer loans — such as home and
auto loans.

• Credit Unions- Unlike most banks which strive to make a profit for shareholders, credit unions are not-for-profit
institutions that accept deposits and make loans. They are owned by their members, passing any earnings back to
their membership instead of shareholders. Credit union membership is usually limited to people who work or live in
a certain area.

• Savings and Loan Associations also called thrifts or S&Ls, savings and loan associations focus primarily on helping
people become homeowners. Federal law limits the types of loans and commercial accounts S&Ls can take part in.
But they may offer higher interest rates to depositors to raise money for mortgage loans.
 Types of Banks (Continued)
Commercial Banks- Commercial banks are standalone institutions or departments within a bank that focus
on corporate, government, small business or nonprofit customers. They tend to specialize in financial
products and services tailored to the needs of these large entities.
• Community Development Banks- Smaller than commercial banks, community development banks —
also called CD banks — focus on their local community. They are typically created to provide financial
services including deposits and loans in underserved communities.
• Investment Banks- Investment banks provide complex financial services to clients, such as
corporations, large nonprofits, pension funds and governments. Services may include working as an
intermediary in mergers and acquisitions or handling the work needed for a client to take their company
public.
• Online-Only Banks - Online banks — also known as virtual banks or “neobanks” — provide e-banking
services via websites and apps. While traditional banks have digital services, online-only banks have no
brick-and-mortar branches. This cuts overhead, allowing the online bank to pass savings to customers.
 Common Banking Products and Services
• Checking Accounts- One of the most common consumer banking services, checking
accounts allow you to store and manage your money, so you can pay for goods and
services directly from your account. It can be tied to direct deposits, ATM or debit
cards.
• Savings Accounts- A savings account allows you to separate money you want to
accumulate from money you want to spend. This service lets you to build up money for
some goal while still giving you quick access to the cash in the account if you need it.
• Certificates of Deposit- A certificate of deposit — or CD — allows you to put money
in an account for a specific amount of time from six months to five years. A CD
typically pays a higher interest rate than a standard savings account.
 Common Banking Products and Services (Continued)
• Money Market Accounts- A money market account allows you to earn higher interest rates than
traditional savings accounts. However, they may require a minimum deposit and require you to maintain
a minimum balance. Money market accounts typically come with FDIC or NCUA insurance protection,
debit cards and check writing abilities.
• Loans- Consumer banks provide several different types of loans. These include personal loans to cover
unexpected expenses, auto loans, home equity loans and personal lines of credit.
• Debit Cards- Debit cards are connected to your checking account, allowing you to swipe the card at a
business and pay for goods or services directly from that account. They may be more convenient than
carrying cash, but you may be on the hook for charges to the card if it’s lost or stolen. Check with your
bank about its requirements.
• Credit Cards- Banks issue credit cards to allow you to make purchases on a line of credit. You borrow
money from the bank each time you use the card, with the promise of paying it back. You pay interest on
these charges unless you pay your credit card fee in full each month. You may also pay a fee to use the
card.
 Relationship between a banker and customer
• The relationship between a Banker and a Customer is based on trust. In today’s world, banks are
considered a pivotal element for the economy of the country. It is an effective banking system that paves
the way for the proper growth of the economy. Customers avail different kinds of services from the bank.
This article critically analyses different types of relationship between customer and banker. It also
discusses different legislations that protect the interest of the banker and customer and also provide
proper remedies to them.
Different kind of relationship
• Relationship of debtor and creditor
• When a customer opens a bank account with the bank, he fills the form and other requisites compulsory
for the same. When he deposits money in his bank account, he becomes a creditor to the bank. The bank
becomes the debtor. The obligations of the bank to carry further business from the deposits of the
consumer are solely dependent on their own choice. The bank can invest that money according to their
own convenience. If the consumer wants to take back that money, then he needs to follow a procedure of
withdrawal.
 Relationship between a banker and customer (Continued)
• Relationship of pledger and pledgee- When a customer pledges an article (goods and documents) with the banker
as a security for the payment of debt or performance of the promise, the customer becomes a pledger and the banker
becomes the pledgee.

• Relationship of bailor and a bailee- Section 148 of the Indian Contract Act, 1872 defines Bailment, bailor and
bailee. A “Bailment” is the transfer of goods from one person to another for some purpose, upon a contract that they
shall return the goods after completion of the purpose or will dispose of the goods according to the direction agreed
as per the terms and conditions of the contract. The person delivering the good is called the bailor and the person to
whom the good is delivered is called the bailee. Banks secure their advances by taking some tangible assets as
securities. Sometimes they keep valuable items, or land and other things as security. By doing so, the bank becomes
the baillie and the consumer becomes the bailor.

• Relationship of lesser and lesse- Section 105 of Transfer of Property Act, 1882 defines lease, lessor, lesse, premium
and rent. A lease of immovable property is transferred to the right to enjoy the property for a certain period of time.
The transferor is the lessor. The transferee is called the lessee.

• Relationship of trustee and beneficiary- When a bank receives money or other valuable securities, then
the banker’s position is of a trustee. On the other hand, when a bank receives money and uses it in various
sectors, the bank becomes the beneficiary.
 General and Special Types of Banking Customers
• Bank is an important service sector organization. Customers play the most significant part in bank. Customer is the one
who uses the banking products and services and judges the quality of those products and services. Banking relationship is a
contract between the Bank & the Customer.

• TYPES OF BANK CUSTOMERS- During the opening of accounts, the banker deals with different types of customers. The
banker should acquaint himself with various laws governing different types of customers. The customers can be classified as
follows:

• 1. Personal accounts: Banker should take care and verify the certain fact while opening of accounts of individual. As per
Indian Contract Act 1872, a person is competent to enter into a valid contract and open a bank account provided:

• i) Individual should be major, i.e. of 18 years of age;

• ii) He should be sound mind;

• iii) He is otherwise not disqualified by any law;

• iv) He Should not be an insolvent;

• v) He should be in good sense while lending a loan and entering into a contract.
 General and Special Types of Banking Customers
(Continued)
• Various types of personal accounts in banks are as under:

• a) Accounts of Single Individual: This is purely a personal account in the name of an individual and is normally
operated upon by the account holder himself. The account holder may authorize another person to operate on his account.
For this purpose, he gives a Mandate or executes a Power of Attorney in favour of such a person.

• In order to avoid legal complications that may arise after the death of the account holder, it is desirable to suggest opening
of a joint account in the names of two individuals (unless it is essential in certain circumstances to open an account in the
single name only), and/or to obtain proper nomination.

• b) Joint Accounts of Individuals: A joint account is opened in the names of more than one individual for convenience of
operations and/ or to avoid legal complications upon death of one of the joint account holders. A joint account is neither a
partnership nor a trust account. It is important to obtain clear and unambiguous instructions regarding the mode of
operation and repayment of balance of a joint account in the event of death of one or more joint account holder(s).
Different types of operational instructions are as under:

• (i) Jointly or Survivor (ii) Either or Survivor

• (iii) Former or Survivor (iv) any one or Survivor

 General and Special Types of Banking Customers (Continued)
• One or more of the joint account holders can authorise operation on the account on his/their behalf by giving a Mandate or
executing a Power of Attorney, but, such Mandate or Power of Attorney must be given by all the parties to the accounts.
Addition/deletion of any name, material alteration, closure of account & operational instructions in the joint account can
be changed by all the account holders jointly. However, in joint accounts with operational instructions “Former or Survivor”,
instructions can be changed/revoked only by Former.

• c) Illiterate person: Illiterate person is a person who cannot read or write. Such persons are competent to enter in to a
valid contract. The account(other than Current Account) of such a person may be opened provided he/she calls on the Bank
with a latest passport size photograph. Photograph is essential for identification. Thereupon, his thumb impression or mark
should be obtained on the account opening form/card in the presence of the Bank’s official. Such thumb impressions or
marks affixed by illiterate persons on instruments are equivalent to their signatures. Any withdrawal/repayment of deposit
amount and/or interest by way of withdrawal form or otherwise should similarly be affixed with the thumb impression or
mark of the depositor.

• d) Blind Persons: Blind Persons can operate the account in bank. Signature of Thumb impression of blind person in the
A/c opening form to be witnessed by a person who should certify that contents of the A/c opening form were explained to
the blind person in his/her presence. The sign may be authorised by bank officer and a witness known to both the bank and
the blind person. He should always visit the branch for cash withdrawal. As per all banking facilities including net banking,
ATM, Cheque Book, Locker facility, loans to be offered to visually challenged customers without discrimination.

• e) Minors’ Accounts: A minor is a person below the age of 18 years. A minor is under legal incapacity to contract by
himself and, therefore, a guardian recognized by law along can deal with the person and property of the minor. The term
“guardian” includes a natural guardian or guardian appointed by the Court of Law. Ordinarily, an account of a minor is
opened and operated upon by the natural guardian of the minor or by the guardian appointed by the Court.
 General and Special Types of Banking Customers (Continued)
• 2. Hindu Undivided Family(HUF): Hindu Undivided Family’ otherwise known as ‘Joint Hindu Family’ property, business
or ancestral estates and its common possession, enjoyment ownership is the basis of formation of [Link] per Hindu law,
the Hindus, Sikhs & Jains can form HUF.

• HUF is governed basically by two schools of thought. In Bengal, it is governed by Dayabhag Law. In other parts of India, it is
governed by Mitakshara Law. The law governing Hindu Undivided Family is codified under Hindu Code and now,
succession among Hindu is governed by Hindu Succession Act, 1956. Parts of this Act was amended in 2005 by the Hindu
Succession (Amendment) Act, [Link] of Hindu Law under which all major members of the family get right by birth
in the ancestral property of the family.

• HUF property is managed by senior most major male member called ‘Manager’ or ‘Karta’. Upon death of Karta, next senior
male coparcener becomes Karta. Joint owners of HUF are known as coparceners. It consists of one common living ancestor
and his all male & female (female included from Sept. 2005) descendent up to three generations next to him. HUF cannot
enter into a partnership as per Supreme Court judgement of 1998.

• HUF account is operated by Karta. Karta has authority to borrow money for the family necessities & for ancestral family
business. Documents are to be executed by Karta. All major coparceners are to be made guarantors. The liability of the
‘Karta’ is unlimited, whereas the liability of the coparceners is limited to their shares in the joint family estate.
 General and Special Types of Banking Customers (Continued)
• 3. Partnership Firm: Partnership is the relation between persons who have agreed to share profits of business carried on
by all or any one them acting for all (Indian Partnership Act 1932). As per RBI instruction now Registration Certificate and
Partnership deed to be obtained. As per Indian Companies Act 2013, Maximum number of partner can be up to 100 in a
firm (Earlier number of partner was restricted to 20 for other businesses & 10 for banking business). Partnership is not a
distinct legal person from the partners who have made partnership firm. HUF cannot enter into a partnership as per
Supreme Court judgement of 1998. The firm should have PAN or GST Number. A partner cannot delegate his authority to
operate the account.

• A minor cannot be a partner, but he can be admitted for his benefit in an existing partnership firm. The particulars of minor
partner, particularly the DOB should be properly recorded.

• In case of death/retirement/insolvency of a partner account should be stopped, if the balance is in debit and a fresh account
should opened after fresh sanction of limit. In case of dispute when one partner revokes the authority against the other
partner, operation in the account should be stopped.

• Dissolution of the Partnership firm can take place by following ways:

• By mutual consent;

• Death/insolvency/retirement of a partner;

• Operation of Law (insolvency of all partners, business becoming unlawful, dissolution by a competent court; and

• In case of automatic dissolution.

 General and Special Types of Banking Customers (Continued)
• 4. Limited Liability Partnership (LLP): A limited liability partnership (LLP) is a partnership in which some or all partners (depending on
the jurisdiction) have limited liabilities. LLP is governed by limited liability partnership Act 2008. Liability is limited to the extent of his
contribution in the LLP. Minimum 2 designated partner and no limit on maximum number of Partners. A partner is not liable for another
partner’s misconduct or negligence, except in certain cases. LLP is a legal entity separate from its partner. It has own assets in his name, sure
and be sued. Since LLP contains element of both ‘a corporate structure’ as well as ‘a partnership firm structure’ LLP is called a hybrid
between a company and a partnership. It has perpetual succession (death of a partner does not affect the existence of LLP). Partners have a
right to manage the business directly. Firms and companies can get themselves converted into LLP. LLP cannot raise fund from public.

• 5. Companies: Companies are defined in Indian Company Act 1956. As per the provision of Company Act 2013 (implemented with effect
from 1st April 2014), recognizes a joint Stock Company is a legal person with perpetual entity & is distinct from its members. A company or
association of persons can be created at law as legal person so that the company in itself can accept limited liability for civil responsibility.
Because companies are legal persons, they also may associate and register themselves as companies otherwise it will be treated as illegal.
Address of the registered office is compulsory. It is the address at which all the documents & notices may be served upon the company.
Cheques favouring company are not to be credited to the personal accounts of the Directors or other officers of the company.

• Following documents are required for account opening of a company:

• i) Certificate of Incorporation: Issued by Registrar of Companies. It is conclusive proof for incorporation of the company & compliance of
all formalities by promoters.

• ii) Certificate of commencement of business: A company having share capital cannot commence business until it has obtained the
certificate to commence business (COB) from the concerned Registrar of Companies. Certificate of commencement of business is not
required by Private Ltd. Co. as its shares are closely held & it can commence business on its incorporation.
 General and Special Types of Banking Customers
(Continued)

• iv) Article of Association: Regulations controlling internal management of the company. Rights & powers of the Directors, rules about
conduct of company meetings & business, Procedure for borrowing & limit on borrowing etc.

• iv) Copy of Board Resolution: Certified copy of Board Resolution authorizing to borrow from the Bank with details of limit, security
etc., Persons who are authorized to sign the security documents & operate the Bank Account, persons in whose presence Seal of the
company will be affixed to the security documents.

• v) Company identification Number (CIN): As per RBI guidelines Company Identification Number (CIN) assigned by the ROC is now
compulsory for opening of bank account of the company.

• vi) Company common Seal: Common seal if any, of the company available should be embossed on bank`s documents. As per Companies
(Amendment) Act, 2015 and RBI instruction Company Common Seal is not necessary, if other documents available during current
account opening.
 General and Special Types of Banking Customers (Continued)
• Different types of companies in India

• a) Private Company: Private Company has shareholders with limited liability and its shares may not be offered to the general
public. Private Limited Company having a no minimum paid-up share capital limitation now. (As per Companies (Amendment)
Act, 2015, paid-up share capital of one lakh rupee or such higher paid-up share capital as may be prescribed is omitted now). It
has minimum two members and maximum member restricted to two hundred and Minimum two directors and no maximum
number of directors is restricted.

• b) Public Company: Public company means a company which is not a private company and has no minimum paid-up share
capital limitation now (As per Companies (Amendment) Act, 2015, paid-up share capital of five lakh rupee or such higher paid-up
share capital as may be prescribed is omitted now). Shares are offered to the public & are listed on stock exchange. Minimum
seven members no limit of maximum number. Minimum 3 directors maximum 15 director limits. Provided that a company may
appoint more than fifteen directors after passing a special resolution (As per Companies Act 2013, no Central Govt. permission
required now). At least one-woman director shall be on Board. Certificate of commencement of business is must to do any type of
business.

• c) Government Company: “Government Company” means any company in which not less than fifty one percent. Of paid-up
share capital is held by the Central Government, or by any State Government, or partly by the Central Government and partly by
one or more State Governments and includes a company which is a subsidiary company of such a Government company.

• d) One Person Company: The Companies Act 2013 Act introduces a new type of entity to the existing list i.e. apart from forming
a public or private limited company, the 2013 act enables the formation of a new entity a ‘one-person company’ (OPC). An OPC
means a company with only one person having a sole member [section 3(1) of 2013 Act]. An OPC can be formed only by an Indian
Resident and citizen.
 General and Special Types of Banking Customers (Continued)
• e) Other Companies: As per Companies act 1956, companies can be classified on the basis of time, place of incorporation and nature of
working share capital as follows:

• i) Foreign Company: It means a company incorporated outside India and having a place of business in India whether by itself or through an
agent, physically or through electronic mode and conduct any business activity in India in any other manner.

• ii) Existing Company: A company which is established before the Company Act 1956 is called Existing Company.

• iii) Holding Company: A company is known as the holding company of another company if it has control over another company.

• iv) Subsidiary Company: A company is known as subsidiary of another company when control is exercised by the latter over the former
called a subsidiary company. A company is to be deemed to be subsidiary company of another.

• 6. Trust: Trusts are governed by the Indian Trust Act, 1882. A trust is created when ownership of a property is transferred to someone for
holding or managing it for benefit of another person(s). Trust may be public charitable trust or private trust (for benefit of private
individuals). Trusts managed by trustees. Loan can be granted if it is for the purpose of the trust. Trustee is authorised to borrow as per the
trust deed. Original Trust Deed to be examined before financing. Certificate of Registration under Public Trust Act to be examined & copy to
be kept on record.

• 7. Clubs & Societies: Clubs & Societies are non-profit making organisation and represent a group of persons. These are normally
incorporated under Cooperative Society Act. Clubs can be registered under Society Act 1860, or Company Act 1956. These get the status of
a legal entity only after their incorporation in their own name. These are governed by rules & regulations (bye laws). Certified true copy of
resolution. Cheques favouring society, club, association not to be collected in individual accounts of office bearers or employees.
 Deposits
• “A deposit is a financial term that means money held at a bank.” A deposit is a transaction involving a transfer of money to another
party for safekeeping. However, a deposit can refer to a portion of money used as security or collateral for the delivery of a good.

• Types of Deposits

• On the basis of purpose they serve, bank deposit accounts may be classified as follows:

• Savings Bank Account

• Current Deposit Account

• Fixed Deposit Account

• Recurring Deposit Account

• Savings Bank Account- As the name suggests this type of account is suitable for people who have a definite income and are
looking to save money. For example, the people who get salaries or the people who work as laborers. This type of account can be
opened with a minimum initial deposit that varies from bank to bank. Money can be deposited at any time in this account.

• Withdrawals can be made either by signing a withdrawal form or by issuing a cheque or by using an ATM card. Normally banks put
some restriction on the number of withdrawal from this account. Interest is allowed on the balance of deposit in the account. The
rate of interest on savings bank account varies from bank to bank and also changes from time to time. A minimum balance has to be
maintained in the account as prescribed by the bank
 Deposits (Continued)
• Current Deposit Account- Big businessmen, companies, and institutions such as schools, colleges, and hospitals have to make
payment through their bank accounts. Since there are restrictions on the number of withdrawals from a savings bank account, that
type of account is not suitable for them. They need to have an account from which withdrawal can be made any number of times.

• Banks open a current account for them. Like a savings bank account, this account also requires a certain minimum amount of
deposit while opening the account. On this deposit, the bank does not pay any interest on the balances. Rather the account holder
pays a certain amount each year as an operational charge.

• These accounts also have what we call the overdraft facility. For the convenience of the accountholders banks also allow
withdrawal of amounts in excess of the balance of the deposit. This facility is known as an overdraft facility. It is allowed to some
specific customers and up to a certain limit subject to previous agreement with the bank concerned.

• Fixed Deposit Account

• Some bank customers may like to put away money for a longer time. Such deposits offer a higher interest rate. If money is
deposited in a savings bank account, banks allow a lower rate of interest. Therefore, money is deposited in a fixed deposit account
to earn interest at a higher rate.

• This type of deposit account allows the deposit to be made of an amount for a specified period. This period of deposit may range
from 15 days to three years or more during which no withdrawal is allowed. However, on request, the depositor can encash the
amount before its maturity. In that case, banks give lower interest than what was agreed upon. The interest on a fixed deposit
account can be withdrawn at certain intervals of time. At the end of the period, the deposit may be withdrawn or renewed for a
further period. Banks also grant a loan on the security of the fixed deposit receipt.
 Deposits (Continued)
• Recurring Deposit Account

• While opening the account a person has to agree to deposit a fixed amount once in a month for a certain period. The total deposit
along with the interest therein is payable on maturity. However, the depositor can also be allowed to close the account before its
maturity and get back the money along with the interest till that period.

• The account can be opened by a person individually, or jointly with another, or by the guardian in the name of a minor. The rate of
interest allowed on the deposits is higher than that on a savings bank deposit but lower than the rate allowed on a fixed deposit for
the same period.

• The Recurring Deposit Accounts may be of the following types:

• Home Safe Account or Money Box Scheme: For regular savings, the bank provides a safe or box (Gullak) to the depositor. The
safe or box cannot be opened by the depositor, who can put money in it regularly, which is collected by the bank’s representative at
intervals and the amount is credited to the depositor’s account. The deposits carry a nominal rate of interest.

• Cumulative-cum-Sickness deposit Account: A certain fixed sum is deposited at regular intervals in this account. The accumulated
deposits over time along with interest can be used for payment of medical expenses, hospital charges, etc.

• Home Construction deposit Scheme/Saving Account: In this account, we can deposit the money regularly either for the purchase or
construction of a flat or house in future. The rate of interest offered on the deposit, in this case, is relatively higher than in other
recurring deposit accounts.
 Evolution of Commercial Banks in India
The commercial banking industry in India started in 1786 with the establishment of the Bank of Bengal in Calcutta. The Indian
Government at the time established three Presidency banks, viz., the Bank of Bengal (established in 1809), the Bank of Bombay
(established in 1840) and the Bank of Madras (established in 1843). In 1921, the three Presidency banks were amalgamated to
form the Imperial Bank of India, which took up the role of a commercial bank, a bankers’ bank and a banker to the Government.
The Imperial Bank of India was established with mainly European shareholders. It was only with the establishment of Reserve
Bank of India (RBI) as the central bank of the country in 1935, that the quasi-central banking role of the Imperial Bank of India
came to an end. In 1860, the concept of limited liability was introduced in Indian banking, resulting in the establishment of joint-
stock banks. In 1865, the Allahabad Bank was established with purely Indian shareholders. Punjab National Bank came into being
in 1895

• Between 1906 and 1913, other banks like Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and
Bank of Mysore were set up. After independence, the Government of India started taking steps to encourage the spread of banking
in India. In order to serve the economy in general and the rural sector in particular, the All India Rural Credit Survey Committee
recommended the creation of a state-partnered and state-sponsored bank taking over the Imperial Bank of India and integrating
with it, the former state-owned and state-associate banks. Accordingly, State Bank of India (SBI) was constituted in 1955.
Subsequently in 1959, the State Bank of India (subsidiary bank) Act was passed, enabling the SBI to take over eight former state-
associate banks as its subsidiaries.

• One important feature of the reforms of the 1990s was that the entry of new private sector banks was permitted. Following this
decision, new banks such as ICICI Bank, HDFC Bank, IDBI Bank and UTI Bank were set up. Commercial banks in India have
traditionally focused on meeting the short-term financial needs of industry, trade and agriculture. However, given the increasing
sophistication and diversification of the Indian economy, the range of services extended by commercial banks has increased
significantly, leading to an overlap with the functions performed by other financial institutions. Further, the share of long-term
financing (in total bank financing) to meet capital goods and project-financing needs of industry has also increased over the years.
 Objectives of Bank
1. To establish as an institution for maximizing profits and to conduct overall economic activities.

• 2. To collect savings or idle money from the public at a lower rate of interests and lend these public money at a higher rate of
interests.

• 3. To create propensity of savings amongst the people.

• 4. To motivate people for investing money with a view to bringing solvency in them.

• 5. To create money against money as an alternative for enhancing supply of money.

• 6. To build up capital through savings.

• 7. To expedite investments.

• 8. To extend services to the customers.

• 9. To maintain economic stability by means of controlling money market.

• 10. To extend co-operation and advices to the Govt. on economic issues.

• 11. To assist the Govt. for trade& business and socio-economic development
 Indian Banking System
• Banks and banking in India have been classified into various groups. In its activities, each group has its own set of advantages and
disadvantages. They have their own distinct target audience. Some work exclusively in the rural sector, while others work in both
rural and urban settings. The majority of them only serve cities and major towns.

• The banking industry is one of the most essential financial pillars of the financial sector, and it is critical to the economy’s
functioning. It is critical for a country’s economic development that its trade, industrial, and farm funding needs are handled with
greater commitment and responsibility. As a result, a country’s progress is inextricably related to the development of banking. In
today’s economy, banks should be viewed as development leaders rather than money merchants. They play a crucial role in deposit
mobilization and credit disbursement to many sectors of the economy.

• The Reserve Bank of India (RBI), commercial banks, cooperative banks, and development banks comprise India’s banking system
(development finance institutions). The core of India’s financial system is these institutions, which serve as a meeting point for
savers and investors. Banks play a vital role in the development of poor countries by mobilizing resources and efficiently allocating
them.

• The features of the Indian banking system:

• Deals with Money- A bank’s main characteristic is that it handles all financial transactions. You can put your money in a bank
account, for example, to store it safely, and you will be interested in the money you save in the account.

• Provides Loans- Banks gain additional money by providing loans for a variety of products. The bank earns the additional funds by
lending money to the qualifying person at predetermined rates.

• Banks now provide loans for a variety of purposes, including study loans, vehicle loans, housing loans, personal loans, and so on.
 Indian Banking System (Continued)
• Withdrawal and payment facilities- Customers can use a bank’s numerous payment and withdrawal services to receive
their money quickly and easily. Customers can use cheques and draughts to withdraw money, as well as ATMs established
by banks at various sites throughout the city.

• Internet services- Modern banks now provide internet services, which is another element of a bank. The growth of the
internet and its integration into the banking industry has made it even easier for customers to do numerous transactions.
Through their apps, banks are providing online services. You can pay your bills, buy groceries, and shop without having cash
on you.

• Business- Banking’s sole purpose is not to supply consumers with banking services. To make additional money, all banks
are involved in subsidiary enterprises. Their only responsibility is to deliver optimum customer satisfaction and maximum
interest rates in order to attract more clients to bank with them. To make a profit, money is moved from one hand to the
next.

• Indian banking system meaning

• A banking system is a collection of institutions that provides us with financial services. These organizations are in charge of
running a payment system, making loans, accepting deposits, and assisting with investments.

• The importance of banking system in India

• Insufficient capital formation makes economic development difficult in a country. Commercial banks are encouraging
individuals to save their money and mobilize it for beneficial uses at this time.
 Indian Banking System (Continued)
• Credit creation boosts output, boosting economic growth and, in turn, creating a large number of job prospects.

• Commercial banks promote balanced regional development in India by providing the required financial infrastructure and money to
backward areas.

• By providing timely loans to agricultural farmers, commercial banks aid in the promotion of the primary sector.

• They offer advanced loans to consumers for the purchase of assets such as residences, consumer goods, and furniture, among other
things, and they encourage individuals to pursue a higher level of living.

• The banking sector plays a significant part in the Indian economy, as commercial banks support the Indian government in achieving
each aim of the country’s planned economic development.

• For both internal and external trade, commercial banks offer the necessary financial backing and infrastructure.

• Conclusion- A banking system is a collection of institutions that provides us with financial services. These organizations are in
charge of running a payment system, making loans, accepting deposits, and assisting with investments. The Reserve Bank of India
(RBI), commercial banks, cooperative banks, and development banks comprise India’s banking system (development finance
institutions). The core of India’s financial system is these institutions, which serve as a meeting point for savers and investors.
Banks play a vital role in the development of poor countries by mobilizing resources and efficiently allocating them
 Role of Foreign Banks In India
• The Indian banking system is one of the largest and most advanced in the world, with a large number of
public and private sector banks, regional rural banks, and foreign banks operating within the country.
These banks play a crucial role in the growth and development of the Indian economy by providing various
financial services to individuals, businesses, and the government.

• Foreign banks, as the name suggests, are banks that have headquartered in a different country but have
operations in India. They play a significant role in the Indian banking sector by providing competition,
improving services, and attracting foreign investment. These banks bring with them international expertise,
technology, and financial services that can complement and enhance the existing banking system in India.

• Historical Overview

• The presence of foreign banks in India dates back to the late 19th and early 20th centuries, with the
establishment of branches of foreign banks in major cities like Mumbai and Kolkata. Over the years, the
regulations and policies governing the operations of foreign banks in India have evolved significantly. In
the initial stages, foreign banks faced restrictions on their operations and the types of services they could
offer, but as the Indian economy grew, these restrictions were gradually relaxed, and foreign banks were
allowed to expand their operations.
 Role of Foreign Banks In India
The impact of foreign banks on the Indian economy has been mixed. On the one hand, foreign banks have brought
in advanced technology and financial services, improving India’s overall banking system and making it more
competitive. They have also brought in significant foreign investment, which has contributed to the economy’s
growth. On the other hand, some argue that the entry of foreign banks has increased competition and reduced
the market share of local banks, leading to job losses and consolidation in the banking sector.

• Overall, foreign banks have played a crucial role in the development of the Indian banking sector and have
brought in international expertise, technology, and financial services that have helped improve the banking
system in India.

• Advantages of Foreign Banks in India

• The presence of foreign banks in India has several advantages, including:

• 1. Technological advancements- Foreign banks bring with them advanced technology and digital banking
solutions, which have helped improve the overall banking system in India. This has made banking services more
accessible, convenient, and efficient for customers.

• 2. Increased competition- The entry of foreign banks has increased competition in the Indian banking sector,
which has led to better products and services being offered to customers. This has helped improve the quality of
banking services and increase customer satisfaction.
 Role of Foreign Banks In India
• 3. Access to global financial markets- Foreign banks have access to global financial markets and can provide
their customers with access to a wider range of financial products and services. This has helped increase the
competitiveness of the Indian banking sector and attract more foreign investment into the country.

• 4. Improved financial services- Foreign banks bring with them international expertise and best practices, which
have helped improve the quality of financial services offered in India. This has increased customer satisfaction
and greater financial inclusion, especially in rural and underdeveloped areas.

• Challenges faced by Foreign Banks in India

• 1) Stringent regulations- Foreign banks in India face several regulations, including those related to capital
requirements, banking licenses, and compliance with local laws and regulations. These regulations can be
stringent and can impact the efficiency and profitability of foreign banks in India.

• 2) Cultural differences- Foreign banks may also face challenges related to cultural differences, including
different business practices and customer expectations. This can make it difficult for foreign banks to fully
integrate into the local market and compete effectively with local banks.

• 3) Competition with local banks- Foreign banks face significant competition from local banks, who are well-
established in the market and have a better understanding of local customers and market dynamics. This can
make it challenging for foreign banks to gain market share and compete effectively.
 Role of Foreign Banks In India

4) Managing the balancing act between local and global operations- Foreign banks in India must also
balance their local and global operations, which can be challenging as they need to comply with local
regulations and meet the expectations of both local and international customers.

• Impact on the Indian Banking System

• 1) Competition- The presence of foreign banks in India has increased competition in the banking sector,
which has led to better products and services being offered to customers.

• 2) Improved services- Foreign banks bring with them international expertise and best practices, which
have helped improve the quality of financial services offered in India.

• 3) Access to capital and expertise- Foreign banks can provide access to capital and expertise, which can
help support the growth and development of the Indian economy.

• 4) Pressure to adopt best practices- The entry of foreign banks has also put pressure on local banks to
adopt best practices and improve their services, which has helped improve the overall banking system in
India.
 Banks Reforms

• Banking Reforms- The reforms in the Indian banking sector have been introduced to increase the
efficiency, stability, and effectiveness of banks. Some of these recent reforms are:

• National Asset Reconstruction Company Limited (NARCL): Setting up of the NARCL was announced
in the Union Budget 2021-22. The objective was to construct a 'bad bank' which would house bad loans of
Rs. 500 crore (US$ 62.63 million) and above.
• There are already 28 existing asset reconstruction companies (ARCs) on the market. However, due to
the sizeable and fragmented nature of the bad loan book held by different lenders, significant amounts of
NPAs continue to appear on bank balance sheets. Thus, more choices and alternatives like the NARCL
are required.
• NARCL will have a dual structure – it will consist of an asset management company (AMC) and an
asset reconstruction company (ARC) to recover and manage stressed assets. It is a collaboration between
private and public sector banks (PSBs), but PSBs will maintain 51% ownership in NARCL.
• NARCL will be capitalised through equity from banks and non-banking financial companies (NBFCs).
If necessary, it will also issue new debt. The guarantee provided by the Government of India will lower
the need for up-front capital. The NARCL will be assisted by the India Debt Resolution Company Ltd
(IDRCL).
 Banks Reforms
• In August 2022, the NARCL offered to buy the distressed loan accounts of five companies, including
Future Retail.

• India Debt Resolution Company Ltd. (IDRCL): The IDRCL is a service company/operational entity
whose purpose is to manage the assets of the NARCL with the help of turnaround experts and market
professionals. The NARCL will buy assets by presenting an offer to the lead bank; IDRCL will be included
for management and value addition after NARCL's offer is accepted. Public FIs and PSBs will hold a 49%
stake in IDRCL, and the rest will be with private banks.

• Digital Rupee: The central bank's digital currency (CBDC), the RBI's digital rupee, was announced in the
Union Budget 2022-23, and is expected to be launched by the end of this financial year. India's digital
economy is predicted to benefit greatly from the introduction of the digital rupee.
• A CBDC is a digital representation or token of a nation's legal currency.
• A CBDC can benefit customers with better liquidity, scalability, acceptance, convenience of transactions
with anonymity, and quicker settlement.
• Similar to how UPI made digital cash more user-friendly, this development will increase people's access
to digital currencies.
• Adopting the digital rupee is expected to help cross-border remittances and reduce the transaction cost
for businesses and the government.
 Banks Reforms

• The digital rupee would reduce the settlement risk in the financial system.

• National Bank for Financing Infrastructure and Development (NaBFID): The NaBFID has been set up
as a Development Financial Institution (DFI) to aid India in developing long-term infrastructure financing.
• The NaBFID has both developmental and financial objectives.
• Unlike banks, DFIs do not take deposits from the general public. Instead, they raise funds from the
government, the market and multilateral institutions, and are often backed by the government's
guarantee. The government initially holds 100% of the shares in the bank, which may subsequently be
reduced to 26%.
• The NaBFID was set up as a corporate body with an authorised share capital of Rs. 1 lakh crore (US$
12.53 billion).
• The NaBFID plans to finance multiple projects that are a part of India's Rs. 6 trillion (US$ 75.18 billion)
National Monetisation Pipeline.
 Banks Reforms
• Road Ahead
India's financial regulators have helped craft one of the strongest banking and financial systems in the
world. In order to provide better and more accessible banking experiences, the Indian government has
implemented several reforms and policies, which help the country deal with any change in economic
conditions and demographics.

• Information technology and electronic money transfer systems have become the two cornerstones of
modern banking development in the area of technology-based banking. Banks now offer a variety of
products that go far beyond traditional banking, and these services are now available 24/7.

• Consumers today are more demanding of virtual banking experiences due to the advancement of digital
technologies. The pandemic has only increased the demand for stress-free access to financial products and
services, and the necessity for quick and easy access to banking products, services, and information. After
internet and mobile banking, payments banks will provide a third alternative channel, increasing efficiency
and lowering expenses associated with serving customers in rural and semi-urban areas. Upcoming
technical advancements, such as the digital rupee, will significantly impact India's banking sector as we
move forward.
THANK YOU