Chapter 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 derived from the French word Banco which means 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.
Definition of a Bank
Oxford Dictionary defines a bank as "an establishment for custody of money,
which it pays out on customer's order."
Characteristics / Features of a Bank
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.
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.
Chapter Types of Banks
Saving Banks
Saving banks are established to create saving habit among the people. These
banks are helpful for salaried people and low income groups. The deposits
collected from customers are invested in bonds, securities, etc. At present most
of the commercial banks carry the functions of savings banks. Postal department
also performs the functions of saving bank.
Commercial Banks
Commercial banks are established with an objective to help businessmen. These
banks collect money from general public and give short-term loans to
businessmen by way of cash credits, overdrafts, etc. Commercial banks provide
various services like collecting cheques, bill of exchange, remittance money
from one place to another place.
In India, commercial banks are established under Companies Act, 1956. In
1969, 14 commercial banks were nationalised by Government of India. The
policies regarding deposits, loans, rate of interest, etc. of these banks are
controlled by the Central Bank.
Industrial Banks / Development Banks
Industrial / Development banks collect cash by issuing shares & debentures
and providing long-term loans to industries. The main objective of these banks
is to provide long-term loans for expansion and modernisation of industries.
In India such banks are established on a large scale after independence. They
are Industrial Finance Corporation of India (IFCI), Industrial Credit and
Investment Corporation of India (ICICI) and Industrial Development Bank of
India (IDBI).
Type 4. Land Mortgage / Land Development Banks

Land Mortgage or Land Development banks are also known as Agricultural
Banks because these are formed to finance agricultural sector. They also help in
land development.
In India, Government has come forward to assist these banks. The Government
has guaranteed the debentures issued by such banks. There is a great risk
involved in the financing of agriculture and generally commercial banks do not
take much interest in financing agricultural sector.
Indigenous Banks

Indigenous banks means Money Lenders and Sahukars. They collect deposits
from general public and grant loans to the needy persons out of their own funds
as well as from deposits. These indigenous banks are popular in villages and
small towns. They perform combined functions of trading and banking
activities. Certain well-known indian communities like Marwaries and Multani
even today run specialised indigenous banks.
Type 6. Central / Federal / National Bank

Every country of the world has a central bank. In India, Reserve Bank of India,
in U.S.A, Federal Reserve and in U.K, Bank of England. These central banks
are the bankers of the other banks. They provide specialised functions i.e. issue
of paper currency, working as bankers of government, supervising and
controlling foreign exchange. A central bank is a non-profit making institution.
It does not deal with the public but it deals with other banks. The principal
responsibility of Central Bank is thorough control on currency of a country.
Type 7. Co-operative Banks

In India, Co-operative banks are registered under the Co-operative Societies
Act, 1912. They generally give credit facilities to small farmers, salaried
employees, small-scale industries, etc. Co-operative Banks are available in rural
as well as in urban areas. The functions of these banks are just similar to
commercial banks.
Type 8. Exchange Banks

Hong Kong Bank, Bank of Tokyo, Bank of America are the examples of
Foreign Banks working in India. These banks are mainly concerned with
financing foreign trade.
Following are the various functions of Exchange Banks :-
1. Remitting money from one country to another country,
2. Discounting of foreign bills,
3. Buying and Selling Gold and Silver, and
4. Helping Import and Export Trade.
Type 9. Consumers Banks
5.
6. Consumers bank is a new addition to the existing type of banks. Such
banks are usually found only in advanced countries like U.S.A. and
Germany. The main objective of this bank is to give loans to consumers
for purchase of the durables like Motor car, television set, washing
machine, furniture, etc. The consumers have to repay the loans in easy
installments.
Introduction To Banks

Banks have developed around 200 years ago. The natures of banks have
changed as the time has changed. The term bank is related to financial
transactions. It is a financial establishment which uses, money deposited by
customers for investment, pays it out when required, makes loans at interest
exchanges currency etc. however to understand the concept in detail we need to
see some of its definitions. Many economists have tried to give different
meanings of the term bank.
Nature of Commercial Banks

Commercial banks are an organisation which normally performs certain
financial transactions. It performs the twin task of accepting deposits from
members of public and make advances to needy and worthy people form the
society. When banks accept deposits its liabilities increase and it becomes a
debtor, but when it makes advances its assets increases and it becomes a
creditor. Banking transactions are socially and legally approved. It is
responsible in maintaining the deposits of its account holders.

Definitions of Commercial Banks

While defining the term banks it is taken into account that what type of task is
performed by the banks. Some of the famous definitions are given below:

According to Prof. Sayers, "A bank is an institution whose debts are widely
accepted in settlement of other people's debts to each other." In this definition
Sayers has emphasized the transactions from debts which are raised by a
financial institution.

According to the Indian Banking Company Act 1949, "A banking company
means any company which transacts the business of banking . Banking means
accepting for the purpose of lending of investment of deposits of money from
the public, payable on demand or other wise and withdraw able by cheque, draft
or otherwise."

Functions of Commercial Banks

Commercial bank being the financial institution performs diverse types of
functions. It satisfies the financial needs of the sectors such as agriculture,
industry, trade, communication, etc. That means they play very significant role
in a process of economic social needs. The functions performed by banks are
changing according to change in time and recently they are becoming customer
centric and widening their functions. Generally the functions of commercial
banks are divided into two categories viz. primary functions and the secondary
functions. The following chart simplifies the functions of banks.

Primary Functions of Commercial Banks

Commercial Banks performs various primary functions some of them are given
below
1. Accepting Deposits : Commercial bank accepts various types of deposits
from public especially from its clients. It includes saving account
deposits, recurring account deposits, fixed deposits, etc. These deposits
are payable after a certain time period.
2. Making Advances : The commercial banks provide loans and advances
of various forms. It includes an over draft facility, cash credit, bill
discounting, etc. They also give demand and demand and term loans to all
types of clients against proper security.
3. Credit creation : It is most significant function of the commercial banks.
While sanctioning a loan to a customer, a bank does not provide cash to
the borrower Instead it opens a deposit account from where the borrower
can withdraw. In other words while sanctioning a loan a bank
automatically creates deposits. This is known as a credit creation from
commercial bank.

Secondary Functions of Commercial Banks

Along with the primary functions each commercial bank has to perform several
secondary functions too. It includes many agency functions or general utility
functions. The secondary functions of commercial banks can be divided into
agency functions and utility functions.
A. Agency Functions : Various agency functions of commercial banks are
o To collect and clear cheque, dividends and interest warrant.
o To make payment of rent, insurance premium, etc.
o To deal in foreign exchange transactions.
o To purchase and sell securities.
o To act as trusty, attorney, correspondent and executor.
o To accept tax proceeds and tax returns.
B. General Utility Functions : The general utility functions of the
commercial banks include
o To provide safety locker facility to customers.
o To provide money transfer facility.
o To issue traveller's cheque.
o To act as referees.
o To accept various bills for payment e.g phone bills, gas bills, water
bills, etc.
o To provide merchant banking facility.
o To provide various cards such as credit cards, debit cards, Smart
cards, etc.


Nationalisation of Banks in India - Introduction

After independence the Government of India (GOI) adopted planned economic
development for the country (India). Accordingly, five year plans came into
existence since 1951. This economic planning basically aimed at social
ownership of the means of production. However, commercial banks were in the
private sector those days. In 1950-51 there were 430 commercial banks. The
Government of India had some social objectives of planning. These commercial
banks failed helping the government in attaining these objectives. Thus, the
government decided to nationalize 14 major commercial banks on 19th July,
1969. All commercial banks with a deposit base over Rs.50 crores were
nationalized. It was considered that banks were controlled by business houses
and thus failed in catering to the credit needs of poor sections such as cottage
industry, village industry, farmers, craft men, etc. The second dose of
nationalisation came in April 1980 when banks were nationalized.




Chapter Objectives Behind Nationalisation of Banks in India

The nationalisation of commercial banks took place with an aim to achieve
following major objectives.
1. Social Welfare : It was the need of the hour to direct the funds for the
needy and required sectors of the indian economy. Sector such as
agriculture, small and village industries were in need of funds for their
expansion and further economic development.
2. Controlling Private Monopolies : Prior to nationalisation many banks
were controlled by private business houses and corporate families. It was
necessary to check these monopolies in order to ensure a smooth supply
of credit to socially desirable sections.
3. Expansion of Banking : In a large country like India the numbers of
banks existing those days were certainly inadequate. It was necessary to
spread banking across the country. It could be done through expanding
banking network (by opening new bank branches) in the un-banked areas.
4. Reducing Regional Imbalance : In a country like India where we have a
urban-rural divide; it was necessary for banks to go in the rural areas
where the banking facilities were not available. In order to reduce this
regional imbalance nationalisation was justified:
5. Priority Sector Lending : In India, the agriculture sector and its allied
activities were the largest contributor to the national income. Thus these
were labeled as the priority sectors. But unfortunately they were deprived
of their due share in the credit. Nationalisation was urgently needed for
catering funds to them.
6. Developing Banking Habits : In India more than 70% population used to
stay in rural areas. It was necessary to develop the banking habit among
such a large population.

Demerits, Limitations - Bank Nationalisation in India

Though the nationalisation of commercial banks was undertaken with tall
objectives, in many senses it failed in attaining them. In fact it converted many
of the banking institutions in the loss making entities. The reasons were obvious
lethargic working, lack of accountability, lack of profit motive, political
interference, etc. Under this backdrop it is necessary to have a critical look to
the whole process of nationalisation in the period after bank nationalisation.
The major limitations of the bank nationalisation in India are:-
1. Inadequate banking facilities : Even though banks have spread across
the country; still many parts of the country are unbanked. Especially in
the backward states such as the Uttar Pradesh, Madhya Pradesh,
Chhattisgarh and north-eastern states of India.
2. Limited resources mobilized and allocated : The resources mobilized
after the nationalisation is not sufficient if we consider the needs of the
Indian economy. Some times the deposits mobilized are enough but the
resource allocation is not as per the expansions.
3. Lowered efficiency and profits : After nationalisation banks went in the
government sector. Many times political forces pressurized them.
Banking was not done on a professional and ethical grounds. It resulted
into lower efficiency and poor profitability of banks.
4. Increased expenditure : Due to huge expansion in a branch network,
large staff administrative expenditure, trade union struggle, etc. banks
expenditure increased to a dangerous levels.
5. Political and Administrative Inference : Many public sector banks
badly suffered due to the political interference. It was seen in arranging
loan meals. It ultimately resulted in huge non-performing assets (NPA) of
these banks and inefficiency.
These are several limitations faced by the banks nationalisation in India.
Apart from this there are certain other limitations as well, such as weak
infrastructure, poor competitiveness, etc.
But after Economic Reform of 1991, the Indian banking industry has entered
into the new horizons of competitiveness, efficiency and productivity. It has
made Indian banks more vibrant and professional organizations, removing the
bad days of bank nationalisation.
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