28
UNIT I What is a Bank ? Introduction Finance is the life blood of trade, commerce and industry. Now-a-days, banking sector acts as the backbone of modern business. Development of any country mainly depends upon the banking system. The term bank is either derived from old Italian word banca or from a French word banque both mean a Bench or money exchange table. In olden days, European money lenders or money changers used to display (show) coins of different countries in big heaps (quantity) on benches or tables for the purpose of lending or exchanging. A bank is a financial institution which deals with deposits and advances and other related services. It receives money from those who want to save in the form of deposits and it lends money to those who need it. 1. Dealing in Money

snscourseware.org€¦  · Web view2019. 12. 11. · UNIT I. What is a . Bank ? Introduction. Finance is the life blood of trade, commerce and industry. Now-a-days, banking sector

  • Upload
    others

  • View
    1

  • Download
    0

Embed Size (px)

Citation preview

Page 1: snscourseware.org€¦  · Web view2019. 12. 11. · UNIT I. What is a . Bank ? Introduction. Finance is the life blood of trade, commerce and industry. Now-a-days, banking sector

UNIT I

What is a Bank ?

Introduction

Finance is the life blood of trade, commerce and industry. Now-a-days, banking sector acts as the backbone of modern business. Development of any country mainly depends upon the banking system.

The term bank is either derived from old Italian word banca or from a French word banque both mean a Bench or money exchange table. In olden days, European money lenders or money changers used to display (show) coins of different countries in big heaps (quantity) on benches or tables for the purpose of lending or exchanging.

A bank is a financial institution which deals with deposits and advances and other related services. It receives money from those who want to save in the form of deposits and it lends money to those who need it.

1. Dealing in Money

Bank is a financial institution which deals with other people's money i.e. money given by depositors.

2. 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.

Page 2: snscourseware.org€¦  · Web view2019. 12. 11. · UNIT I. What is a . Bank ? Introduction. Finance is the life blood of trade, commerce and industry. Now-a-days, banking sector

3. 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 fixed period. It gives safety to the deposits of its customers. It also acts as a custodian of funds of its customers.

4. Giving Advances

A bank lends out money in the form of loans to those who require it for different purposes.

5. Payment and Withdrawal

A bank provides easy payment and withdrawal facility to its customers in the form of cheques and drafts, It also brings bank money in circulation. This money is in the form of cheques, drafts, etc.

6. Agency and Utility Services

A bank provides various banking facilities to its customers. They include general utility services and agency services.

7. Profit and Service Orientation

A bank is a profit seeking institution having service oriented approach.

8. Ever increasing Functions

Banking is an evolutionary concept. There is continuous expansion and diversification as regards the functions, services and activities of a bank.

9. 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.

10. Banking Business

A bank's main activity should be to do business of banking which should not be subsidiary to any other business.

11. Name Identity

A bank should always add the word "bank" to its name to enable people to know that it is a bank and that it is dealing in money.

Page 3: snscourseware.org€¦  · Web view2019. 12. 11. · UNIT I. What is a . Bank ? Introduction. Finance is the life blood of trade, commerce and industry. Now-a-days, banking sector

The first bank called the ‘Bank of Venice’ was established in Venice, Italy in 1157.

The first bank in India was the ‘Bank of Hindustan’ started in 1770 by Alexander & Co., an

English agency house in Calcutta which failed in 1782 with the closure of the agency house.

But the first bank in the modern sense was established in the Bengal Presidency as the Bank

of Bengal in 1806.

Commercial Bank: Definition, Function, Credit Creation and Significances!

Definition: Commercial Bank can be described as a financial institution, that offers

basic investment products like a savings account, current account, etc to the individuals and

corporates. Along with that, it provides a range of financial services to the general public

such as accepting deposits, granting loans and advances to the customers.

It is a profit making company, which pays interest at a low rate to the depositors and charges higher rate of interest to the borrowers and in this way, the bank earns the profit.

Types of Commercial Bank

Page 4: snscourseware.org€¦  · Web view2019. 12. 11. · UNIT I. What is a . Bank ? Introduction. Finance is the life blood of trade, commerce and industry. Now-a-days, banking sector

Commercial banks are classified into two categories i.e. scheduled commercial banks and non-scheduled commercial banks. Further, scheduled commercial banks are further classified into three types:

Private Bank: When the private individuals own more than 51% of the share capital, then that banking company is a private one. However, these banks are publicly listed companies in a recognized exchange.

Public Bank: When the Government holds more than 51% of the share capital of a publicly listed banking company, then that bank is called as Public sector bank.

Foreign Bank: Banks set up in foreign countries, and operate their branches in the home country are called as foreign banks.

Non-scheduled commercial banks refer to the banks which are not covered in the Reserve Bank of India’s second schedule. The paid-up capital of such banks is not more than Rs. 5 lakhs.

Functions of Commercial Bank

1. Primary functions

Accepting Deposits: The primary function for which the commercial banks were established is to accept deposits from the general public, who possess surplus funds and are willing to deposit them so as to earn interest on it.

Page 5: snscourseware.org€¦  · Web view2019. 12. 11. · UNIT I. What is a . Bank ? Introduction. Finance is the life blood of trade, commerce and industry. Now-a-days, banking sector

There are various products offered by the bank to the customers for the deposit of their money, which includes savings account, current account, fixed deposit and recurring deposit.

Advancing Loans: Next important function performed by the commercial bank is lending money to the individuals and companies. The banks make loans to the customers in the form of term loans, cash credit, overdraft and discounting of bills of exchange.

Page 6: snscourseware.org€¦  · Web view2019. 12. 11. · UNIT I. What is a . Bank ? Introduction. Finance is the life blood of trade, commerce and industry. Now-a-days, banking sector

Secondary functions Agency Services: There are some facilities provided by the commercial banks in which

they act as an agent of the customers. Such services are:

Collection and payment of rent, interest and dividend.

Collection and payment of cheques and bills.

Buying and selling securities.

Payment of insurance premium and subscriptions.

General Utility Services: Commercial banks provide general utility services to the customers and charges a fee for the same. It covers services like:

Safekeeping of valuables, documents etc, in locker or vault.

ATM card, credit card and debit card facility.

Issue of demand draft, pay order and traveller’s cheque.

Internet and mobile banking

Sale of application forms of competitive exams.

Transfer of funds: Banks assist in the transfer of funds from one person to another or from one place to another through its credit instruments.

Credit Creation: The commercial banks are authorized to create credit, by granting more loans than the amounts deposited by the customers.

A commercial bank offers an array of facilities such as internet banking, mobile banking, ATM facility, credit card facility, NEFT, RTGS and so forth for which it charges a definite sum as a fee for providing these facilities

5. Agency functions of the bank:

The bank acts as an agent of its customers and gets commission for performing

agency functions as under:

(i) Transfer of funds:

It provides facility for cheap and easy remittance of funds from place-to-place through

demand drafts, mail transfers, telegraphic transfers, etc.

(ii) Collection of funds:

It collects funds through cheques, bills, bundles and demand drafts on behalf of its

customers.

(iii) Payments of various items:

Page 7: snscourseware.org€¦  · Web view2019. 12. 11. · UNIT I. What is a . Bank ? Introduction. Finance is the life blood of trade, commerce and industry. Now-a-days, banking sector

It makes payment of taxes. Insurance premium, bills, etc. as per the directions of its

customers.

(iv) Purchase and sale of shares and securities:

It buys sells and keeps in safe custody securities and shares on behalf of its customers.

(v) Collection of dividends, interest on shares and debentures is made on behalf of its

customers.

(iv) Acts as Trustee and Executor of property of its customers on advice of its customers.

(vii) Letters of References:

It gives information about economic position of its customers to traders and provides

similar information about other traders to its customers.

6. Performing general utility services:

The banks provide many general utility services, some of which are as under:

(i) Traveller’s cheques .The banks issue traveler’s cheques and gift cheques.

(ii) Locker facility. The customers can keep their ornaments and important documents in

lockers for safe custody.

(iii) Underwriting securities issued by government, public or private bodies.

(iv) Purchase and sale of foreign exchange (currency).

Types of Commercial Banks:

The following chart depicts main types of commercial banks in India.

Page 8: snscourseware.org€¦  · Web view2019. 12. 11. · UNIT I. What is a . Bank ? Introduction. Finance is the life blood of trade, commerce and industry. Now-a-days, banking sector

Scheduled Banks and Non-scheduled Banks:

Commercial banks are classified in two broad categories—scheduled banks and non-

scheduled banks.

Scheduled banks are those banks which are included in Second Schedule of Reserve

Bank of India. A scheduled bank must have a paid-up capital and reserves of at least Rs 5

lakh. RBI provides special facilities including credit to scheduled banks. Some of important

scheduled banks are State Bank of India and its subsidiary banks, nationalised banks, foreign

banks, etc.

Non-scheduled Banks:

The banks which are not included in Second Schedule of RBI are known as non-

scheduled banks. A non-scheduled bank has a paid-up capital and reserves of less than Rs 5

lakh. Clearly, such banks are small banks and their field of operation is also limited.

A passing reference to some other types of commercial banks will be informative.

Industrial Banks provide finance to industrial concerns by subscribing (buying) shares

and debentures of companies and also give long-term loans to acquire machinery, plants, etc.

Foreign Exchange Banks are commercial banks which are branches of foreign banks and

facilitate international financial transactions through buying and selling of foreign bills.

Agricultural Banks finance agriculture and provide long-term loans for buying

tractors and installing tube-wells. Saving Banks mobilise small savings of the people in

savings account, e.g., Post office saving bank. Cooperative Banks are organised by the people

for their own collective benefits. They advance loans to their members at fair rate of interest.

Page 9: snscourseware.org€¦  · Web view2019. 12. 11. · UNIT I. What is a . Bank ? Introduction. Finance is the life blood of trade, commerce and industry. Now-a-days, banking sector

Significance of Commercial Banks:

Commercial banks play such an important role in the economic development of a

country that modern industrial economy cannot exist without them. They constitute nerve

centre of production, trade and industry of a country. In the words of Wick-sell, “Bank is the

heart and central point of modern exchange economy.”

The following points highlight the significance of commercial banks:

(i) They promote savings and accelerate the rate of capital formation.

(ii) They are source of finance and credit for trade and industry.

(iii) They promote balanced regional development by opening branches in backward areas.

(iv) Bank credit enables entrepreneurs to innovate and invest which accelerates the process of

economic development.

(v) They help in promoting large-scale production and growth of priority sectors such as

agriculture, small-scale industry, retail trade and export.

(vi) They create credit in the sense that they are able to give more loans and advances than

the cash position of the depositor’s permits.

(vii)They help commerce and industry to expand their field of operation.

(viii) Thus, they make optimum utilisation of resources possible.

Commercial banks follow certain principles to serve the maintain some principles which are very important for banks to remain in the competition in modem days.The bank which deals with money and money a worth with a view to earning prom is known as the commercial bank.

Commercial banks must maintain some principles which are very important for banks to remain in the competition in modem days. principles that commercial banks follow;

1. Liquidity.2. Solvency.3. Profitability.4. Loan and Investment.5. Savings.

Page 10: snscourseware.org€¦  · Web view2019. 12. 11. · UNIT I. What is a . Bank ? Introduction. Finance is the life blood of trade, commerce and industry. Now-a-days, banking sector

6. Services.7. Secrecy.8. Efficiency.9. Location.

1. Principle of LiquidityThe principle of liquidity is very important for the commercial bank. Liquidity refers

to the ability of an asset to convert into cash without loss within a short time.Paying the deposited money on demand of’ customers is called liquidity in sense of banking.2. Principle of Solvency

Solvency means the financial capability or sufficiency in the capital. To stay in these competitive market commercial banks must have sufficient capital. If the funds are not sufficient the bank cannot run his business.The main source of fund of the commercial bank is the deposited money by the depositors’ through the different type of account.Depositors keep cash in the bank, especially for safety. So commercial bank must ensure the safety of deposited fund.3. Principle of Profitability

The main objective of the commercial bank is to earn a profit. For earning profit commercial bank have to make the investment by providing short-term loan, before providing loan commercial bank have to compensate a certain amount of money as liquidity.4. Principle of Loan and Investment

The main source of profit of bank is granting loans to any individual or organization. Investment is the profitable and sound source of income. Commercial banks invest in business and investment sector.5. Principle of Savings

Commercial banks collect fund by creating savings facilities. Commercial banks try to collect savings from society surplus.The commercial bank makes the investment from this savings to generate profit. So, more savings, more investment, and more profit.6. Principle of Services

Commercial bank ensures best services to their customers. The success of a bank depends on the services provided by the bank. Customer chooses those banks that provide improved services.7. Principle of Secrecy

Customers want to keep secret about their valuable assets and money. So banks must have to keep secret about their customer’s account. If a commercial bank does not maintain secrecy the customer will be dissatisfied.8. Principle of Efficiency

The commercial bank should operate their business efficiently. So that they can succeed at the objective.In this competitive market, there is no alternative way without efficiency in management. So commercial bank must train their employees to increase the efficiency in management.9. Principle of Location

Commercial banks must have to locate their branches in the commercial area where many customers are available. The location must be safe for the customers and easy communication system must exist.Other principles;

Page 11: snscourseware.org€¦  · Web view2019. 12. 11. · UNIT I. What is a . Bank ? Introduction. Finance is the life blood of trade, commerce and industry. Now-a-days, banking sector

The principle of goodwill. The principle of the economy. The principle of technology. The principle of publicity.

Classification of Sources of Funds

Sources of Funds

Business simply cannot function without money, and the money required to make a business function is known as business funds. Throughout the life of business, money is required continuously. Sources of funds are used in activities of the business. They are classified based on time period, ownership and control, and their source of generation.

Page 12: snscourseware.org€¦  · Web view2019. 12. 11. · UNIT I. What is a . Bank ? Introduction. Finance is the life blood of trade, commerce and industry. Now-a-days, banking sector

Period Basis Sources

On the basis of the period, the different sources of funds can be classified into three parts. Which are:

Long-term sources fulfil the financial requirements of a business for a period more than 5 years. It includes various other sources such as shares and debentures, long-term borrowings and loans from financial institutions. Such financing is generally required for the procurement of fixed assets such as plant, equipment, machinery etc.

Medium-term sources are the sources where the funds are required for a period of more than one year but less than five years. The sources of the medium term include borrowings from commercial banks, public deposits, lease financing and loans from financial institutions.

Short-term sources: Funds which are required for a period not exceeding one year are called short-term sources. Trade credit, loans from commercial banks and commercial papers are the examples of the sources that provide funds for short duration.

Short-term financing is very common for the financing of present assets such as inventories and account receivables. Seasonal businesses that must build inventories in terms of future prospects of selling requirements often need short-term financing for the interim period between seasons. Wholesalers and manufacturers with a major portion of their assets used in inventories or receivables also require a large number of funds for a short period.

Ownership Basis Sources

On the basis of ownership, the sources can be classified into Owner’s funds and Borrowed funds. Owner’s funds mean funds which are procured by the owners of a business, which may be a sole entrepreneur or partners or shareholders of a business. It also includes profits which are reinvested in the business. The owner’s capital remains invested in the business for a longer duration and is not required to be refunded during the life period of the business.

This capital forms the base on which owners gain their right of control of management in the business. Some entrepreneurs may not like to dilute their ownership rights in the business and others may believe in sharing the risk. Equity shares and retained earnings are the two important sources from where owner’s funds can be obtained.

Borrowed funds refer to the funds raised with the help of loans or borrowings. This is the most common type of source of funds and is used the majority of the time. The sources for raising borrowed funds include loans from commercial banks, loans from financial institutions, issue of debentures, public deposits and trade credit.

These sources provide funds for a specific period, on certain terms and conditions and have to repay the loan after the expiry of that period with interest. A fixed rate of interest is paid by the borrowers on such loans. Often it does put a lot of burden on the business as

Page 13: snscourseware.org€¦  · Web view2019. 12. 11. · UNIT I. What is a . Bank ? Introduction. Finance is the life blood of trade, commerce and industry. Now-a-days, banking sector

payment of interest is to be made even when the earnings are low or when the loss is incurred. These institutions don’t take into consideration the activities of business after the loan is given. Generally, borrowed funds are provided on the security of some assets of the borrower.

Generation Basis Sources

The way of classifying the sources of funds is whether the funds are generated from within the organization or from external sources of the organization. Internal sources of funds are those that are generated inside the business. A business, for example, can generate funds internally by speeding collection of receivables, disposing of surplus inventories and increasing its profit. The internal sources of funds can fulfil only limited needs of the business.

Whereas, External sources of funds are the sources that lie outside an organization, such as suppliers, lenders, and investors. When a large amount of money is needed to be raised, it is generally done through the external sources. External funds may be costly as compared to those raised through internal sources.

In some cases, business is required to mortgage its assets as security while obtaining funds from external sources. The issue of debentures, borrowing from commercial banks and financial institutions and accepting public deposits are some of the examples of external sources of funds commonly used by business organizations

EMPLOYMENT OR ADVANCING FUNDS :-When we talk about advancing of funds by commercial banks, it mean the profitable and safe use of funds.The main business of the commercial bank is to obtain money from the customer and invest this money. It earns the profit and pays interest to the customers from this profit. So it keeps in view its own interest and also the customer, so there are two objectives :

i. It earns the profit for the customers.ii. To meet the demand of the customers it should keep sufficient cash.

So profitability and liquidity are two main objectives.A bank provides loans to the companies, firms and individuals. So major function is that it should advance the loans. But lending of money is very risky. Before advancing the loans keeps in view some precautions or principles. These are following :

1. Profitability :-It is the major objective in the banking business. Bank can earn maximum profit by investing its deposits in securities yielding height returns while advancing the loans this factor is considered by the banker.

2. Liquidity :-If assets in a short time with minimum cost is called liquidity. It is the basic principle

Page 14: snscourseware.org€¦  · Web view2019. 12. 11. · UNIT I. What is a . Bank ? Introduction. Finance is the life blood of trade, commerce and industry. Now-a-days, banking sector

for investing the funds before the banker. If the investment is not liquid then bank will fail to meet the demand of its depositors. So every bank tries to invest the funds in to ready convertible securities.

3. Ability To Repay :-It is the most important principle for investing funds. The bank keeps in view the borrower ability to repay the debt before lending the money. Character goodwill and business integrity of the borrower must be checked.

4. Productive Purpose :-A banker should advance the loan for productive purpose. It will be very secure and definite source of repayment. Unproductive loans must be discouraged. It is observed that short term productive loans are very ideal.

5. Reasonable Security :-While advancing the loan a banker secures loan by getting reasonable security from the borrower. It is called insurance against the risk of non repayment. The security offered against loan must be adequate and it can be disposed off without a loss and delay.

6. Ready Cash :-A bank must keep the ready cash to meet the demand of the depositors. Any particular limit can be fixed keeping in view the daily experience.

7. Advance Distribution :-In case of lending there is a risk of loss every time, so it is better that loan may not be given to any single particular area. It may be given to large number of borrowers over a large number of areas. It minimizes the risk.

8. Preference To National Interest :-The bank must keep in view the policy of the state. If Govt. asks to provide loan to the agriculturist and small business, it should not be ignored it.

Credit (Money) Creation by Commercial Banks (A10; D10, 10C, 11, 11C):

RBI produces money while commercial banks increase the supply of money by creating

credit which is also treated as money creation. Commercial banks create credit in the form of

secondary deposits.

Mind, total deposits of a bank is of two types:

(i) Primary deposits (initial cash deposits by the public) and (ii) Secondary deposits (deposits

that arise due to loans given by the banks which are assumed to be redeposited in the bank.)

Money creation by commercial banks is determined by two factors namely (i) Primary

deposits i.e. initial cash deposits and (ii) Legal Reserve Ratio (LRR), i.e., minimum ratio of

Page 15: snscourseware.org€¦  · Web view2019. 12. 11. · UNIT I. What is a . Bank ? Introduction. Finance is the life blood of trade, commerce and industry. Now-a-days, banking sector

deposits which is legally compulsory for the commercial banks to keep as cash in liquid form.

Broadly when a bank receives cash deposits from the public, it keeps a fraction of deposits as

cash reserve (LRR) and uses the remaining amount for giving loans. In the process of lending

money, banks are able to create credit through secondary deposits many times more than

initial deposits (primary deposits).

Credit Creation: The most important functions of a Commercial Banks!

The creation of credit or deposits is one of the most important functions of commercial banks.

Like other corporations, banks aim at earning profits. For this purpose, they accept cash in

demand deposits and advance loans on credit to customers.

According to Withers, banks can create credit by opening a deposit, every time they advance

a loan. This is because every time a loan is sanctioned, payment is made through cheques by

the customers. All such payments are adjusted through the clearing house. So long as a loan

is due, a deposit of that amount remains outstanding in the books of the bank. Thus every

loan creates a deposit. But this is an exaggerated and extreme view.

Credit Creation : The Process of Credit Creation in Commercial Banks!

Let us explain the actual process of credit creation. We have seen in our last article that the

ability of banks to create credit depends on the fact that banks need only a small percentage

of cash to deposits. If banks kept 100 per cent cash against deposits, there would be no credit

creation. Modern banks do not keep 100 per

They are legally required to keep a fixed percentage of their deposits in cash, say 10, 15 or 20

per cent. They lend and/or invest the remaining amou

nt which is called excess reserves. A bank can lend equal to its excess reserves. But the entire

banking system can lend and create credit (or deposits) upto a multiple of its original excess

reserves. The deposit multiplier depends upon the required reserve which is the basis of credit

creation. Symbolically, the required reserve ratio:

Page 16: snscourseware.org€¦  · Web view2019. 12. 11. · UNIT I. What is a . Bank ? Introduction. Finance is the life blood of trade, commerce and industry. Now-a-days, banking sector

RRr = RR/D

ADVERTISEMENTS:

or RR = RRr x D

Where RR are the required cash reserves with banks, RRr is the required reserve ratio and D

is the demand deposits of banks. To show that D depends on RR and RRr, divide both sides

of the above equation by RRr:

RR/RRr = RRr x D/RRe

Or RR/RRr = D

Or 1/RRr = D/RR

Or D = 1/RRr = x RR

Where 1/RRr, the reciprocal of the percentage reserve ratio, is called the deposit (or credit)

expansion; the limits of the deposit expansion of a bank. The maximum amount of demand

deposits which the banking system can support with any given amount of RR is by applying

the multiplier to RR. Taking the initial change in the volume of deposits (DD) and in cash

reserves (DRR), it follows from any given percentage of RRr that

∆D = RR x 1/RRr

To understand it, suppose the RRr for the banks is fixed at 10 per cent and the initial change

in cash reserves is Rs 1000. By applying the above formula, the maximum increase in

demand deposits will be

ADVERTISEMENTS:

∆D = 1000 x 1/0.10 = Rs. 10000.

Page 17: snscourseware.org€¦  · Web view2019. 12. 11. · UNIT I. What is a . Bank ? Introduction. Finance is the life blood of trade, commerce and industry. Now-a-days, banking sector

This is the extent to which the banking system can create credit. The above equation can also

be expressed as follows:

DD = RR [1+(1-RRr) + (Y-RRr)2+…+(1-RRr)n]

The sum of the geometric progression within brackets gives:

1/1-(1 – RRr) = 1/RRr

∆D = ∆RR x 1/RRr

The deposit expansion multiplier rests on the assumptions that banks lend out all their excess

reserves and RRr remains constant.

To explain the process of credit creation, we make the following assumptions:

1. There are many banks, say А, В, C, etc., in the banking system.

2. Each bank has to keep 10 percent of its deposits in reserves. In other word 10 per cent is

the required ratio fixed by law.

3. The first bank has Rs. 1000 as deposits.

4. The loan amount drawn by the customer of one bank is deposited in full in the second

bank, and that of the second bank into the third bank, and so on.

5. Each bank starts with the initial deposit which is deposited by the debtor of the other bank.

Banking Systems

Whenever large number of entities or corporations joins together and make up a system is known as banking system. They carry out their specific job of raising funds and lending resources in the economic and financial market. The main purpose and explanation of the existence of this sector is the need for certain organizations to be in charge of carrying out financial inter-mediation operations. In this way, it is possible that the money moves from one place to another adjusting to certain risks and deadlines that marks the financial reality.

The bank is responsible through its own activity and nature to obtain economic and financial resources through a multitude of instruments created for such purpose, such as bonds, deposits or obligations. Alternatively, this system of entities is responsible for facilitating the

Page 18: snscourseware.org€¦  · Web view2019. 12. 11. · UNIT I. What is a . Bank ? Introduction. Finance is the life blood of trade, commerce and industry. Now-a-days, banking sector

access of its clients to these resources through banking tools such as loans and mortgages, in exchange for interest or commissions previously agreed upon in each operation.

In that sense, at a basic level of study, it can be defined that the interest collected is the profit of the bank, which at the same time faces a series of costs derived from the interests that in turn this one pays to its own creditors. The difference between both variables is known as the profit or margin of a bank, to give a simple example.

The evolution of the concept of banking has been developing throughout history, being present its nature in the different civilizations from ancient Egypt especially. However, the emergence of currency as a means of payment was the rapid evolution of the banking business, which reached its formal establishment in the modern age and the Renaissance.

Top 5 types of banking are;

1. Group banking,2. Chain banking,3. Branch banking,4. Unit banking,5. Mixed banking.

The term Banking may define as accepting of deposit of money from the public for the purpose of lending or investing investment of that money which are repayable on demand or otherwise and withdraw by cheque, draft or order.Let’s analyze the 5 types of banking.1. Group Banking

A plan offered by banks designed to be used by groups rather than individuals. A common example is a company plan offered to employees.Usually, the bank will offer incentives such as discounts, lower fees, and interest rates, as well as other benefits not available to individual customers.Group banking members may have access to lower interest rates, lower fees, discounts and other perks not available to regular account holders.Group banking can also provide a more personalized banking relationship for the members if the bank designates one representative, who is generally more knowledgeable about the group’s needs, as the point of contact for all the members of the group.2. Chain Banking

Conceptually, chain banking refers to a form of bank governance that occurs when a small group of people controls at least three banks that are independently chartered.Usually, the controlling parties are majority shareholders or the heads of interlocking directorates. Chain banking as an entity has declined with the surge in interstate banking.Chain banking is a situation in which three or more banks that are independently chartered are controlled by a small group of people.

The concept of chain banking is different from group banking, in that the entities involved in the chain bank arrangement remain autonomous and are not owned by a single holding company.

By contrast, the group banking model requires a holding company to own all the banks involved, effectively creating an umbrella under which all the banks operate.Chain banking is also different from branch banking, a situation where all local branches of a bank are owned by a single banking institution.

Page 19: snscourseware.org€¦  · Web view2019. 12. 11. · UNIT I. What is a . Bank ? Introduction. Finance is the life blood of trade, commerce and industry. Now-a-days, banking sector

A bank holding company is a company that controls one or more banks but does not necessarily engage in banking itself.3. Mixed Banking

Mixed banking is a system of banking where a bank combines both deposit banking as well as investment banking. In other words, the bank will provide short-term loans for commerce and trade and long-term finance for industrial units.

While this type of banking promotes rapid industrialization, the mixed banking system reduces the liquidity of funds of commercial banks.Stated differently, it difficult to pay back the borrowed funds of customers whenever they make a demand of their money.

This is because funds get blocked when the bank gives long-term loans to industries.Read more: Ideal Loans and Problem Loans: Causes of Problem Loans4. Unit Banking

Banking systems encourage either small, independent banks or banks that are theoretically independent but are in fact owned by a bank holding company.Advantages of Unit Banking

1. Local funds for local people: The unit banking of a particular locality utilizes its resources for the development of its own locality only and does not transfer them to other localities like branch banking.

2. Intimate Knowledge of Customer: The Managers of the local unit bank can easily acquire the personal knowledge of customers as well as the specialized knowledge of the local industries and occupations. Therefore he is in a better position to serve the need of the local borrowers; lie has greater chances of cultivating a friendly and personal relationship with the individual entrepreneurs of his locality.

3. Continent management supervision and control.4. Discontinuance of inefficient branches.

5. Branch BankingBranch banking refers to a single bank which operates through various branches in a

city or in different locations or out of the cities. It offers a wide array of face to face service to its customers.Services provided by a branch include cash withdrawals and deposits from a demand account with a bank teller, financial advice through a specialist, safe deposit box rentals etc..Advantages of Branch BankingRapid growth and wide popularity of branch banking system in the 20th century are due to various advantages as discussed below.

1. Economics of Large ScaleOperations under the branch banking system, the bank with a number of branches possess huge financial resources and enjoy the benefits of large-scale operations, Highly trained and experienced staff is appointed which increases the efficiency of

management. Division of labor is introduced in the banking operations which ensures greater

economy in the working of the bank. Right persons are appointed at the right place and specialization increases,

Large financial resources and wider geographical coverage increases public confidence in the banking system.

Page 20: snscourseware.org€¦  · Web view2019. 12. 11. · UNIT I. What is a . Bank ? Introduction. Finance is the life blood of trade, commerce and industry. Now-a-days, banking sector

2. Spreading of RiskAnother advantage of the branch banking system is the lesser risk and greater capacity to meet risks Since there are geographical spreading and diversification of risks, the possibility of

the failure of the of the bank is remote. The losses incurred by some branches may be offset by the profits earned by other

branches. Large resources of branch banks increase their ability to face any crisis.

3. The economy in Cash ReservesUnder the branch banking system, a particular branch can operate without keeping large amounts of idle reserves. In a time of the need, resources can be transferred from one branch to another.

4. Diversification of Deposits and AssetsThere is greater diversification of both deposits and assets under a branch banking system because of wider geographical coverage. Deposits are received from the areas where savings are in plenty, Loans are extended in those areas where funds are scarce and interest rates are high. The choice of securities and investments is larger in this system which increases the. Safety and liquidity of funds.

5. Cheap Remittance FacilitiesSince bank branches are spread over the whole country, it is easier and cheaper to transfer funds from one place to another. Inter-branch indebtedness is more easily adjusted than inter-bank indebtedness.

6. Uniform Interest RatesUnder the branch banking system, the mobility of capital increases, which in turn, brings about equality in interest rates. Funds are transferred from areas with excessive demand for money to areas with deficit demand for money. As a result, the uniform rate of interest prevails in the whole area; it is prevented from rising in the excessive demand area and from falling in the deficit demand area.

7. Proper Use of CapitalThere is a proper use of capital under the branch banking system. If a branch has excess reserves, but no opportunities for investment, it can transfer the resources to other branches which can make the most profitable use of these resources.

8. Hotter Facilities to CustomersThe customers get better and greater facilities under the branch banking system. It is because of the small number of customers per branch and the increased efficiency achieved through large-scale operations.