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WHAT IS BANKING?
January 1, 2016
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WHAT IS BANKING?

Banks are financial institutions which act as intermediary between entities who have surplus funds and those who need funds. People with surplus funds keep deposits with the banks out of which banks make loans to the people who need funds. They also act as levelers of distribution of wealth not only between persons but also between different areas. Banks play an active role in movement of funds from surplus areas to deficit areas, thereby achieving equitable distribution of wealth. However, modem banking covers a large number of activities apart from accepting deposits and making loans.

 

DEFINITION OF BANKING

Banking is a legally defined activity, which means that it is governed by strict rules and regulations. Banking Regulation Act 1949 defines and governs banking activity in India. As per Section 5(b) of this act, banking has been defined as “the accepting, 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”. In simple words it means that banking relates to:

  1. accepting of deposit of money from public
  2. for the purpose of lending, i.e. making loans, and
  3. making investments.

The above are three basic functions of the banks as defined in law. Besides, banking has three unique features that are not available to any other organisation.

  1. The deposits are repayable on demand. This means that one has to make a demand for the repayment and whenever such demand is made; banker has to repay the amount. No company other than banks can accept deposits payable on demand.
  2. Banks are allowed to make use of cheques and no company other than banks can issue its own cheques.
  3. For Banks it is necessary to incorporate words like bank, banking, banker etc. in their name and no other organisation is allowed to use such words hi their name.

                                                               

   BANK LICENCE

To do banking in India it is mandatory, i.e. compulsory by law, to obtain license from Reserve Bank of India (RBI). Even the foreign banks have to obtain a license from RBI before opening a branch in India. RBI also has powers to cancel the license if it is not satisfied with the functioning of the bank.

 

REGULATION OF BANKS

Banking Regulation Act 1949 authorises Reserve Bank of India to regulate and control banks in India. As per section 3S(a) of this law, RBI is fully authorized to issue any instructions / directions to the banks as it deems fit, as and when considered necessary. It is mandatory for all banks (including foreign) to comply with directions of the RBI.                 

 TYPES OF BANK

Banks can be classified on a number of basis. One bank can be classified into more than one category.

                                   CLASSIFICATION OF BANKS

SCHEDULED BANK

A bank whose name appears in the second schedule of the RBI Act 1934 is called ‘scheduled bank.’ Whenever RBI is not satisfied with the functioning of a bank, it may delete the name of that bank from the second schedule. Barring a few small banks, almost all banks (including foreign banks) in India are Scheduled Banks. The bank whose name does not appear in 2nd schedule is called ‘non­scheduled bank’.

 

 RBI ACT OWNERSHIP CONSTITUTION ACTIVITY
Scheduled Public Sector Statutory Bank Commercial
Bank Bank   Bank
Non Private Banks Nationalized Bank Development
Scheduled 1. Indian   Bank
Bank 2. Foreign    
Cooperative Regional Rural
Banks Bank  
 

 

STATUTORY BANK

 

The banks which have been constituted under a separate Act of parliament are called Statutory Bank. Examples of such banks are – Reserve Bank of India (Reserve Bank of India Act-1934); State Bank of India (State Bank of India Act – 1955), IDBI Bank (Industrial Development Bank (Transfer of Undertaking and Repeal) Act, 2003).

 

PUBLIC SECTOR BANKS

 

All those banks where government share holding is 51 or more are called Public Sector Banks. Thus all nationalized banks, SBI, IDBI Bank and RRBs are Public Sector Banks.

 

PRIVATE BANKS

All banks other than public sector banks are called Private Banks. These banks are registered under Indian Companies Act, 1956. They are of two types – Indian Banks and Foreign Banks. Banks registered in India are called Indian Banks and those with their registered office outside India are called Foreign Banks.

 

NATIONALISED BANKS

The banks which were nationalised in 1969 and 1980 vide Banking Companies (Acquisition and Transfer of Undertaking) Act are called nationalised banks. In all, 14 banks were nationalised in 1969 and 6 in 1980. Of the 6 banks nationalised in 1980, New Bank of India was merged with Punjab National Bank in 1993. (These banks fall in the category of public sector bank)

 

REGIONAL RURAL BANKS

These are special purpose low cost banks which were started in 1976 to serve the banking needs of rural area. These banks were formed under Regional Rural Banks Act 1976. (Narasimham Working Group (1975) proposed the establishment of RRBs. A RRB cannot be formed of its own; it has to be sponsored by a public sector bank. 7be capital structure of RRB is jointly subscribed by Central Government – 50, State Government – 15 and Sponsoring Bank – 35.

 

COOPERATIVE BANKS

These banks are co-operative societies registered under respective State Cooperative Societies Act. For their organisational structure, they are governed by State Cooperative Societies Act and for their functions they are governed by RBI

COMMERCIAL BANKS

These banks permit opening of demand deposits apart from time deposits. One of the essential ingredients of a commercial bank is ‘issue of cheque books’; thus providing facility for commercial transactions. All nationalised banks and private banks etc. are commercial banks.

 

 DEVELOPMENT BANKS

These banks provide long term credit while the commercial banks generally provide short term credit. These banks work primarily for development of a particular field. Public dealing in these banks is very limited or cheque book bearing accounts are not opened by these banks. Usually these banks are in public sector. In India, there are five major development banks as under:

  1. NABARD (National Bank for Agriculture and Rural Development): Owned by government of India (99) and RBI (1 ), it works for development of agriculture and rural economy. It is also the regulator of cooperative banks and RRBs.
  1. SIDBI (Small Industries Development Bank of India): Owned by a number of financial institutions, it works for development of small industries.
  1. NHB (National Housing Bank): Owned by Reserve Bank of India, it works for development of housing sector and also regulates housing finance companies.
  2. EXIM Bank (Export Import Bank of India): Wholly owned by Government of India, it works for promotion. and financing of exports.
  3. IFCI (Industrial Finance Corporation of India):

Established on July 1, 1948 under an act of the Parliament, it is the first Development Financial Institution in the country to cater to the long-term finance needs of the industrial sector.