Banking & Finance

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INTRODUCTIONT TO BANKING
The banking system is important for the smooth functioning of the economy. The
bank exist in different forms from the ancient period as early as 2000 B.C.
Babylonians had developed a system of banks. The ‘Old Sanskrit’law book by
Manu is full of governing credit. The functions of bank changes continuously
from the ancient to modern period.
In modern period, all economics in the world are using money for the economic
activities. Nearly 70 to 90 percent money circulated in the modern economy are in
the form of Bank Deposits or bank money. In the modern word bank provide a
variety of services to their customers. Commercial banks facilitate both the flow
of goods and services from producers to customers and the financial activities of
the government. They promote savings and channelize them into investments.
Banks have a key role to play in the process of economic development by
promoting savings, by encouraging investments, by developing enterprise, and by
inculcating managerial and business skills in men
 ORIGIN OF BANK
The word “Bank is either derived from Old Italian word “banca” or from
French word “Banque” both means a Bench or money exchange table.
According to some authorities , the word “Bank” itself is derived from the
word “bancus” or “banque”, that is, a bench.
Another commonly held view is that the word “bank”is originally
derived from the German word “banck” means a joint stock fund, which
was Italianized in “banco”. The Italian word “banco” which was the name
given to a money exchanger’s counter on which he laid out his piles of
money.
Another theory posist that bank comes from the Italian word “monte”
which means a mount or a heap. This word indicate that one requires a heap
of money for carrying on the banking business.
INTRODUCTION TO BANK
A bank is a financial institution that accepts deposits
from the public and creates credit. Lending activities
can be performed either directly or indirectly through
capital markets. Due to their importance in the financial
stability of a country, banks are highly regulated in
most countries. Most nations have institutionalised a
system known as fractional reserve banking under
which banks hold liquid assets equal to only a portion
of their current liabilities.
 MEANING OF BANK
The functions performed by the bank were
continuously evolved over a period of time and they
are still evolving. The bank is define by using the
functions performed. So in simple word, “A bank is
what bank does.”
 DEFINITION OF BANK
“Banking means the acceptance for the purpose of
lending or investment, of deposits of money from the public
repayable on demand or otherwise, and withdrawal by cheque,
draft, order or otherwise”.
–Indian Banking companies Act, 1949
CHARACTERISTICS/FEATURES
 Dealing in Money: Bank is a financial institution which
deals with other people’s money i.e. money given by
depositors.
 Individual/Firm/Company: A bank may be a person,
firm or a company. A banking company means a
company which is in the business of banking.
 Acceptance of Deposit: A bank accepts money from the
people in the form of deposits which are usually
repayable on demand or after the expiry of a period. It
also at as a custodian of funds of its customers.
 Giving Advances: A bank lends out money in the
form of loans to those who require it for different
purposes.
 Payment and Withdrawal: A bank provides easy
payment and withdrawal facility to its customers in
the form of cheques, drafts, Debit Cards, Credit
Cards etc. It also brings bank money in circulation.
 Agency and Utility Services: A bank provides
various banking facilities to its customers. They
include general utility services and agency services.
 Profit and Service Orientation: A bank is a profit
seeking institution having service oriented approach.
Ever increasing Functions: Banking is an
evolutionary concept. There is continuous expansion
and diversification as regards the functions, services
and activities of a bank.
 Connecting Link: A bank acts as a connecting link
between borrowers and lenders of money. Banks
collect money from those who have surplus money
and give the same to those who are in need of money.
 Banking Business: A bank’s main activity should
be to do business of banking which should not be
subsidiary to any other business.
Name Identity: A bank should always add the word
“bank” to its name to enable people to know that it is
a bank that it is dealing in money.
EVOLUTION OF BANKING IN THE WORLD
The banking business is as old as authentic history.
However, the early banking practices were in no way similar
to the modern banking practices. There is evidence of the
existence of banking in most of the ancient civilisations of the
world.
As early as 2,000 B.C. Babylonions had developed a
system of banks. Although the business of banking is as old as
authentic history, banking institutions have since then changed
in character and content very much, evolution of banking in
Europe means the history of banking in the following
European countries.
 1. Banking in Greece and Rome
In ancient Greece and Rom the practice of granting
credit was widely prevalent. In Rome, the bankers
were called Argentarii, Mensarri or Callybistoe. The
banks were called Tabernoe Argentarioe.
People used to settle their creditors by giving a
cheque or draft on the bank. If creditor had also an
account at the same bank, the account was settled by
an order to make the transfer of such money from one
name to another.
To pay money by a draft was known as prescribere and
rescribere, and the draft was known as attribution.
These bankers also received deposits and lend money.
Loan banks were also common in Rome. From these
loan banks, the poor citizens received loans without
paying interest. “They lend money for a period of
three or four years on the security of land.”
The bankers preserved their deposits fully at first, but later
began to use them for their own purposes, creating deposits
and granting credits out of nowhere.
Fractional reserve banking has created periods of growth,
followed by an economical crisis and failure of banks.
The authorities failed to enforce sound banking practices and
often granted banks a government license to operate with a
fractional reserve, while taking advantage of easy loans to
finance governments and public officials. Some rules created
government banks to reap the profits. But banks were still
required to guarantee deposites.
 2. Banking in Italy
During the early periods, although the banking
business was mostly done by private individuals, may
countries established public banks either for the
purpose of facilitating commerce or to serve the
Government one of such banks was the “Bank of
Venice.” It was established in 1157. It is supposed to
be the most ancient bank. Originally, it was not a bank
in the modern sense being simply an office for the
transfer of the public debt.
 It was in Florence, where the growing banking industry gained
great importance by the fourteenth century. From that time have
the bankers begun to misuse a portion of their deposits, inevitably
causing a boom and a recession. This recession was triggered not
only by, “Neapolitan princes” massive withdrawal of funds, but
also by England’s inability to repay its loan and the drastic fall in
the price of Florentine government bond. The public debt was
financed by these speculative new loans created. A general crisis
of confidence occurred, causing the most important banks to fail
between 1341 and 1346. The recovery did not come until after
the plague.
 The powerful Medici bank initially didn’t accept
demand deposits. Later on, their reserve ratio
gradually worsened, and by its end dropped even
below 10%. The bank was ruined by the end of the
14th century like its competitor, and all of its assets fell
into the hands of creditors.
 3. Banking in Spain
As early as 1349, the business of banking was carried on
by the drapers of Barcelona. There it was subject to official
regulation. During 1401, a public bank was established in
Barcelona. It used to exchange money, receive deposits and
discount bill of exchange, both for the citizens and for the
foreigners. During 1407, the Bank of Genoa was
established. The bank of Amsterdam was established in
1609 to meet the needs of the merchants of the city. It is
note that most of the European banks now in existence
were formed on the model of the Bank of Amsterdam.
4. Banking in Germany and Polland.
The Fuggers were fiananciers from 1485 to 1560
and are known as a particularly important banking
family in Southern Germany. Dutch bankers played a
central role in establishing banking in the Northern
German city states. Berenberg Bank is the oldest
private bank in Germany, established in 1590 by
Dutch brothers, Hans and Paul Berenberg in
Hamburg. The bank is still owned by the Bernberge
dynasty.
 5. Banking in Holland
Throught 17th century, precious metals from the
new World, Japan and other Locales have been
channeled into Europe, with corresponding price
increases. Thanks to the free coinage, the Bank of
Amsterdam, and the heightened trade and commerce,
Netherland attracted even more coin and bullion.
These concepts of Fractional reserve banking and
payment systems went on and spread to England and
eldewhere.
EVALUATION OF BANKING IN USA
Evolution of baking in USA explains with
following points:
1) 1791 – 1811: First Attempt at Central Banking: At
the urging of treasury Secretary Alexander Hamilton, in 1791 Congress
established the first Bank of the United States, headquarter in
Philadelphia. Many agrarian-minded Americans, uncomfortable with the
idea of a large and powerful central bank, opposed it. By 1811, When
the bank’s 20- year charter expired, Congress refused, by one vote, to
renew it.
2)1816-1836: A second Try Fails: By 1816 the political climate was again
in favour of a central bank, by a narrow margin, Congress agreed to charter
the Second Bank of the United States. But when Andrew Jackson, a central
bank foe, was elected president in 1828, he vowed to kill it. His attack on its
banker-controlled power touched a popular nerve with Americans, and when
the Second Bank’s charter expired in 1836, it was not renewed.
3)1836-1865: The Free Banking Era: State-chartered bank and
unchartered “Free Banks” took hold during this period, issuing their
own notes, redeemable in gold or specie. Banks also began offering
demand deposits to enhance commerce. In response to a rising volume
of cheque transactions, the New York Clearing house Association was
established in 1853 to provide a way for the city’s banks to exchange
cheques and settle accounts.
4)1863: National Banking Act: During the Civil War the National Bank
Act of 1863 was passed. This created national banks, which issued
circulating notes that had to be backed by U.S. government securities.
5)1873-1907: Financial Panics Prevail: Although the National Bank
Act of 1863 established some measure of currency stability for the
growing nation, bank runs and financial panics continued to plague
the economy. In 1893 a banking panic triggered the worst
depression the United States had ever seen, and the economy
stabilized only after the intervention of financial mogul J.P. Morgan.
It was clear that the nation’s banking and financial system needed
serious attention.
6)1907: A Very Bad Year: In 1907, about the speculation on Wall
Street ended in failure, triggered a particularly sever banking panic.
J.P. Morgan was again called upon to avert disaster. By this time
most Americans wanted reform of the banking system, but the
structure of that reform was cause for deep division among the
country’s citizens.
7)1908-1912: The Stage is set for a Decentralised Central Bank :
The Aldrich-Vreeland Act of 1908, passed as an immediate response
to the panic of 1907, provided for emergency currency issues during
crises. It also established the National Monetary Commission to
search for a long-term solution to the nation’s banking and financial
problems. The 1912 election of Democrat Woodrow Wilson killed
the Republican Aldrich plan, but the stage was set for the
emergence of a decentralised central bank.
8)1914: Open for Business: Before the new central bank could begin
operations, the the Reserve Bank Organizing Committee, comprised of
Treasury Secretary William McAdoo, Secretary of Agriculture David Hauston,
and Comptroller of the Currency John Skelton Williams, had the arduous task
of building a working institution around the bare bones of the new law. But by
November 16, 1914 the 12 cities chosen as sites for regional Reserve Banks
were open for business, just as hostilities in Europe erupted into World War 1 st .
9) 1935: More Changes to Come: The Banking Act of 1935 called for further
changes in the Fed’s structure, including the creation of the Federal Open
Market Committee as a separate legal entity, removal of the Treasury Secretory
and the Comptroller of the Currency from the Fed’s governing board, and the
establishment of member’s terms at 14 years. In 1956 the Bank Holding
Company Act named the Fed as the regulator for Bank holding companies, and
in 1978 the Humphrey-Hawkins Act required the Fed chairman to report to
Congress twice annually on Monetary policy goals and objectives.
10)1980: Modern Banking Industry reforms: The Monetory
Control Act of 1980 required the Fed to price its financial services
competitively against private sector providers and to establish
reserve requirements for all eligible financial institutions. Barriers to
insurance activities, however, proved more difficult to circumvent.
Nonethless momentum for change was steady, and by 1999 the
Gramm-Leach-Bliley Act was passed, in essence overturning the
Glass-Steagall Act of 1933 and allowing banks and insurance sales.
11) 1980 to 1990: Deregulation: Legislation passed by the federal
government during the 1980s, such as the Depository Instituions
Deregulation and Monetory Control Act of 1980 and the Garn-St.
Germain Depository Institution Act of 1982, diminished the
distinction between banks and other financial institution in the
united States.
EVALUATION OF BANKING IN ASIA
After the independence, the government of Asia designed and
implemented the reforms in the market economy in the 1990s.
Essentially, the reform programs took place in two phases. In the
first phase, Between 1993 and 1997, monetary Stabilisation except
for Tajikistan became a priority. In the Second phase government
focused on strengthening the banking system, developing financial
and fiscal stabilisation.
1) The First Phase: During this stage the introduction of sovereign
currencies was accompanied by restrictive monetary policies, to
contain inflation. High interest rates, low level of reserves, lack of
liquidity, economic and political instability and devaluation
continued throughout 1995-96, together with consistent
dollarization of the financial system and an outflow of funds.
2) The Second Phase: The combination of improved monetary
policies structural and institutional reforms, and improved
fiscal discipline eventually brought economic stability to the
Central Asia region by the mid-1990s. Inflation was contained
and dropped from hyperinflationary levels in 1993 to around
15-20 percent in 1997-98, slopping the devaluation of local
currencies, which remained relatively viable until the Russian
financial crisis of 1998. In addition, it the end of 1997 real
gross domestic product (GDP) began to grow in the region.
EVOLUATION OF BANKING IN ENGLAND
Following are the stages in evolution of Banking in the
England:
 The Moneylenders.
 Merchants or Traders.
 The England Goldsmith
 Establishment of Various Banks
EVOLUATION OF BANKING IN INDIA
Following are the stages of evolution of modern banking in
India are as follows:
1. Agency Houses: When the English traders came to India,
they had problem of raising working capital due to the
language barrier. Therefore they established Agency Houses
which combined trading with banking. One agency house
established the first bank in India called the Bank of Hindustan
in 1770. Later on, many banks were established. But they
disappeared as fast as they were born. Anybody could then
start a bank. The field was free for all.
EVOLUATION OF BANKING IN INDIA
2. Presidency Banks: The East India Co., the ruler of India,
took initiative in establishing Presidency Banks by contributing
20% of their share capital to meet its own demand for funds.
Accordingly, Bank of Bengal, Bank of Bombay and Bank of
Madras were established in 1806, 1840 and 1943 respectively.
3. Joint Stock Bank: In 1884, banks were allowed to be
established on the principle limited liability. In Due course, this
encouraged establishment of banks. By the turn of the century,
many banks with the Initiative of Indians were established.
Punjab National Bank, Allahabad Bank, Bank of Baroda are
some of the banks then established. Many foreigners also came
in the field of Indian Banking.
EVOLUATION OF BANKING IN INDIA
4. Imperial Bank of India: To meet the competition of foreign
banks, the three Presidency Banks were amalgamated and a
powerful Imperial bank of India was established in 1921 with its
network of branches all over the country. This bank was later
nationalised in 1955 and it is today’s State Bank of India. This is a
prestigious bank as the Government is its customer.
5. The Reserve Bank of India: Though there was boom in
banking, due to absence of any regulation and facility of timely
assistance there were recurrent bank failures. This resulted in
suspicion about banks in the minds of the people. The need for a
separate Central Bank was emphasised by the Hilton Young
Commission. Accordingly the RBI was established in 1935 to
perform all the functions of a Central Bank.
EVOLUATION OF BANKING IN INDIA
6. Nationalisation of the RBI and Banking Regulation Act:
These two important step were taken in 1949. After
independence wide powers of regulation and control were
given to the RBI and by making use of those powers the RBI
was successful in making Indian banking trustworthy.
7. Nationalisation of Banks in 1969 and 1980: Another
Significant step was taken in 1969 by nationalising 14 big
Indian banks. Then six more banks were nationalised in 1980.
STRUCTURE OF INDIAN BANKING SYSTEM
Reserve Bank of India

Apex Banking Development

Institution Institutions Bank

A) Reserve Bank of India: i) Established in 1st April 1935
ii) Reserve Bank of India Act 1934.
iii) Entire Capital Acquired by the Central Govt. as per Transfer of Ownership Act
1948.
iv) RBI started Functioning as central Bank from 1st January 1949.
v) RBI Act Gives the special status in the banking system of our country with the
Banking Regulation Act 1949.
STRUCTURE OF INDIAN BANKING SYSTEM
B. The Apex Banking Institution:

IDBI NABARD EXIM IIBI NHB

SIDBI Bank
MUDRA
 Industrial Development Bank of India.
 Small Industries Development Bank of India.
 National Bank for Agricultural and Rural Development.
 Export-Import Bank of India.
 Industrial Investment Bank of India: The following are the
functions of IIBI:
i) Provide financial assistance in the form of short, medium
and long-term loans, demand loans, working capital
facilities, equity participation, assets credit, equipment
finance.
ii) Investing in capital market instruments like shares,
debentures, bonds and also money market instruments.
iii) Underwriting and extending guarantees.
iv) Providing leasing and hire purchase finance.
v) Providing consultancy and merchant banking services.
vi) Guarantees loans and deferred payments on behalf of the
industrial concerns.
  National Housing Bank:
 Micro Units Development and Refinance Agency Bank.