Basics of Banking

Banking is a crucial subject for Banking Awareness and general awareness sections in bank exams. It’s also essential for practical purposes for banking and finance aspirants. This article provides relevant information on the basics of banking to help candidates prepare well for exams.

Banking Industry

The banking industry encompasses credit, cash, and various financial transactions for customers.

Definition of a Bank:

A bank is a financial institution that extends credit to customers and accepts deposits. These deposits are used to grant loans to borrowers.

Services Offered by Banks:

Banks provide various services, including:

• Opening different types of bank accounts
• Checking account balances
• Issuing certificates of deposits

Basics of Banking - Meaning & Overview

Meaning of a Bank:

A bank is a financial institution that accepts deposits from the public, creating demand deposits, and provides loans to borrowers. Banks can conduct lending activities directly or through capital markets.

Banking Regulation in India:

After India’s independence, the government took steps to regulate the banking sector. The Reserve Bank of India (RBI) was established in 1935 to regulate the banking system and ensure its stability.

Types of Bank Accounts

There are various types of bank accounts, each with its own features and benefits. Some common types include:

• Savings accounts
• Current accounts
• Fixed deposit accounts
• Recurring deposit accounts

Other Services Offered by Banks

In addition to opening bank accounts, banks provide a range of other services, such as:

• Loans and advances
• Credit cards
• Debit cards
• Internet banking
• Mobile banking

Modern Aspects of Banking

The banking industry has undergone significant changes in recent years, with the advent of technology and globalization. Some modern aspects of banking include:

• Digital banking
• Fintech
• Blockchain technology
• Artificial intelligence (AI)
• Machine learning (ML)

Understanding the basics of banking is essential for anyone interested in a career in banking and finance. It is also important for general awareness and financial literacy.

Banking and Business Sector in India

The government of India introduced a law to clearly define banking and banking business in the country. This law, known as the

Banking Regulation Act (BR Act) of 1949, provides a framework for the banking sector in India.

According to Section 5 (c) of the BR Act, a banking institution is a company that engages in the business of banking in India. Section 5 (b) further describes banking business as accepting deposits from the public for the purpose of lending or investment, with the deposits being repayable on demand or otherwise and withdrawable by cheque, draft, order, or other means.

Types of Banks in India

Banks in India are categorized into four main types:

1. Central Bank:

• The Reserve Bank of India (RBI) is the central bank of India.
• It serves as the apex body responsible for monitoring and regulating other banks and financial institutions in the country.

2. Commercial Banks:

• Commercial banks are financial institutions that provide a wide range of banking services to individuals and businesses.
• They accept deposits, offer loans, and facilitate various payment and investment options.
• Examples of commercial banks in India include State Bank of India (SBI), ICICI Bank, HDFC Bank, and Axis Bank.

3. Specialized Banks:

• Specialized banks are financial institutions that focus on specific sectors or industries.
• They provide specialized financial services tailored to the needs of their target markets.
• Examples of specialized banks in India include EXIM Bank - Export Import Bank of India, National Bank for Agriculture and Rural Development (NABARD), and Small Industries Development Bank of India (SIDBI).

4. Cooperative Banks:

• Cooperative banks are financial institutions owned and controlled by their members.
• They primarily serve the financial needs of rural communities and small businesses.
• Examples of cooperative banks in India include District Central Cooperative Banks (DCCBs) and Primary Agricultural Credit Societies (PACS).

Each type of bank plays a distinct role in the Indian banking sector, catering to the diverse financial requirements of individuals, businesses, and the economy as a whole.

Banking System in India

The banking system in India consists of various types of banks, each playing a specific role in the financial sector.

1. Reserve Bank of India (RBI)

• RBI acts as the central bank of India and plays a crucial role in regulating the country’s monetary and financial system.
• It also acts as the banker to the government and manages the country’s foreign exchange reserves.
• RBI sets key policy rates such as the statutory liquidity ratio (SLR), cash reserve ratio (CRR), reverse repo rate, and repo rate.

2. Commercial Banks

• Commercial banks provide banking services to the general public, including accepting deposits and extending loans.
• They use the loans as investments to earn profits.
• Examples of commercial banks in India include HDFC Bank, State Bank of India, and United Bank of India.

3. Specialized Banks

• Specialized banks are formed to cater to specific industries or sectors.
• They may focus on import and export or provide financial services to particular segments of the economy.
• The Export-Import Bank of India (EXIM Bank) is an example of a specialized bank.

4. Cooperative Banks

• Cooperative banks are established under the State Cooperative Societies Act.
• They provide easy credit to members of cooperative societies, particularly the underprivileged population.
• Examples of cooperative banks in India include New India Cooperative Bank Limited and Ahmedabad Mercantile Cooperative Bank.

Commercial Banks in India

Commercial banks in India are further classified into the following categories:

Public Sector Banks

• Commercial banks in which the government holds a majority of the shares (more than 50%) are public sector banks.
• Examples of public sector banks in India include Punjab National Bank, Canara Bank, and Bank of Baroda.

Private Sector Banks

• Commercial banks in which individual shareholders possess higher equity stakes are called private sector banks.
• The functions and activities of these banks are similar to those of public sector banks.
• However, certain aspects such as charges imposed, duration, and description of services may differ between private and public sector banks.
• Some prominent private sector banks in India include Axis Bank, ICICI Bank, and HDFC Bank.

Small Finance Banks

• These banks aim to provide financial inclusion to the underprivileged masses in the country.
• They also cater to small and micro business units, various entities in the unorganized sector, marginal craftsmen, and small farmers.
• Examples of small finance banks in India include Janalakshmi Small Finance Bank, Ujjivan Small Finance Bank, and Equitas Small Finance Bank.

Regional Rural Banks

• These banks have specific mandates, such as providing loans to small farmers, marginal workers, agricultural laborers, small entrepreneurs, and craftsmen.
• They are established based on the recommendations of the Narasimham Committee on Rural Credit.

Commercial Banks in India and Their Functions

In India, there are various Regional Rural Banks, such as Pragathi Krishna Gramin Bank and Kerala Gramin Bank. However, banking exams often focus on commercial banks and their functions. Let’s delve deeper into the functions of commercial banks in India.

Functions of Commercial Banks

Commercial banks perform a range of functions, including:

1. Accepting Deposits:

• Commercial banks accept deposits from individuals and business organizations.
• These deposits can be in the form of savings deposits, time deposits, or current deposits.

2. Providing Loans:

• Banks use the funds deposited by customers to provide loans.
• Loans can be extended in various forms, such as cash credit, overdraft, discounting bills, and advances.

3. Fund Remittance:

• Commercial banks facilitate money transfer through various modes, including NEFT, draft pay orders, IMPS, and RTGS.
• Specific commissions apply for these services.

4. Cheque Issuance:

• Banks issue cheques to customers for withdrawing funds.
• Cheques can be either bearer or crossed.
• Bearer cheques can be encashed over-the-counter, while crossed cheques can only be deposited into the payee’s account.

5. General Utilities:

• Commercial banks provide additional services such as:
  • Issuing traveler’s cheques
  • Providing credit and debit card facilities
  • Offering locker facilities for safekeeping valuables

6. Services as an Agent:

• Banks act as agents for various services, including:
  • Collecting cheques
  • Paying insurance premiums
  • Handling drafts and bills
  • Acting as trustees or executors for customers’ estates

Commercial banks play a vital role in the financial system by performing various functions, including accepting deposits, providing loans, facilitating fund transfers, issuing cheques, and offering general utilities and agency services. Understanding these functions is crucial for banking exam preparation and gaining a comprehensive knowledge of the banking sector in India.