1.1 INTRODUCTION: Banks play an important role in the economic development of a country.

There may be an economic crisis in the country if the banks stop functioning even for a few days. It is worthy to note the saying of Sayer. Sayer says, Banks are not only purveyors (suppliers) of money but in important sense they are manufacturers of money. The tiny streams of capital flowing into the bank vault become rivers and these in turn fall in to the ocean of national finance to drive the wheels of industry and to float the vessels of commerce. Banks cater to the needs of agriculturists, industrialists, and traders and to all the other sections of the society. Thus, they accelerate the economic growth of a country and steer the wheels of the economy towards its goal of self reliance in all fields. Since the banking activities were started in different periods in different countries, there is no unanimous view regarding the origin of the word bank. The word bank is said to have derived from the French word Banco or Bancus which means, a bench. Initially, the bankers transacted their banking business by sitting on benches in the market place and the bench resembled the banking counter. When their business failed, the benches were broken and hence the word bankrupt has come. Bankrupt means a person who has lost all his money, wealth or financial resources. Another common-held view is that the word bank might be originated from the German word bank which means a joint stock fund. Of course, a bank essentially deals with funds. In due course, it was Italiansed into banco, Franchised into bank and finally Anglicized into bank. This view is most prevalent even today.

1.2 BANKER: According to Oxford Dictionary bank means, an establishment for custody of money which it pays out on customers order. A person who is doing the banking business is called a

banker. But, it is not at all easy to define the term banker precisely because a banker performs multifarious functions. The early definitions were not positive in the sense, they did not point out any of the functions performed by a banker. For instance, The Bill of Exchange act of 1882 defines the banker thus: Banker includes a body of persons whether incorporated or not who carry on the business of banking. So also Sec.3 of the Negotiable Instruments Act states that the term banker includes a person or a corporation or a company acting as a banker. These definitions are vague. They amount to saying that a person who acts as a banker is a banker. According to Macleod the essential business of a banker is to buy money and debts by creating other debts. A banker is essentially a dealer in debts or credit. Dr. L. Hart states in his book Law of Banking that a banker is one who in the ordinary course of his business honors cheques drawn upon him by persons from and for whom he receives money on current accounts. Sir John Paget in his book Law of Banking defines the term banker as follows: That no person or body corporate or otherwise can be a banker who does not, (i) take deposit accounts, (ii) take current accounts, (iii) issue and pay cheques, and (iv) collect cheques crossed and uncrossed for his customers. Crowther defines a bank as, one that collects money from those who have it to spare or who are saving it out of their income and lends the money so collected to those who require it.

All these experts have pointed out some aspects of a banker. They are the following: receiving deposits of various kinds, lending money or creating credit, issuing cheques, honoring cheques and collecting cheques. These are the essential functions of a bank. However, these definitions do not include any agency and general utility services rendered by modern bankers.

The definition given in India in the Banking Regulation Act appears to be more precise and acceptable. Thus Sec.5 (B) of the above mentioned Act defines the term Banking Company as a company which transacts the business of banking in India and the term Banking has been defined as accepting for the purpose of lending and investment, of deposits of money from the public, repayable on demand, order or otherwise and withdrawable by cheques, draft, order or otherwise. Even this definition does not indicate the subsidiary services rendered by the bankers. By now, it is quite evident that no definition of the term banker will be complete one. 1.3 DEVELOPMENT OF BANKING: Banking made its first appearance as a public enterprise in the year 1157 in Italy with the establishment of Bank of Venice. The Bank of Barcelona was started in 1401. The Bank of Genoa in 1407 and the Bank of Amsterdam in 1609. The Lombards who migrated to Europe and England from Italy were responsible for the development of modern banking. When the king Charles II imposed severe restrictions on them, their business was affected at large. Private bankers gradually replaced the gold smiths. After the Banking Act was passed in 1833 in England, the growth of joint stock commercial banking was accelerated. Foundations were laid for the growth of modern commercial banking during the 19th century.

1.4 DEVELOPMENT OF BANKING IN INDIA: Banking in India is indeed as old as Himalayas. But, the banking functions became an effective force only after the first decade of 20th century. To understand the history of modern banking in India, one has to refer to the English Agency Houses established by the East Indian Company. These Agency Houses were basically trading firms and carrying on banking business as part of their main business. Because of this dual functions and lack of their own capital (Agency Houses depend entirely on deposits for their capital requirements) they failed and vanished from the scene during the third decade of 18th century.

The East Indian Company laid the foundations for modern banking in the first-half of the 19th century with the establishment of the following three banks: 1. Bank of Bengal in 1809 2. Bank of Bombay in 1840 3. Bank of Madras in 1843. These banks are also known as Presidency Banks and they functioned well as independent units. During the last part of 19th century and early phase of 20th century, the Swadeshi Movement induced the establishment of a number of banks with Indian Management. In 1920, the Imperial Bank of India Act was passed for amalgamating the three presidency Banks. As such, the Imperial Bank of India was established in 1921. It was given power to hold government funds and manage the public debt. The branches of the bank were functioning as clearing houses (Agency for effecting of funds among banks). However, it was not authorized to issue currency. Even though the need for a Central Bank was felt in the 18th century, it could materialize only in the 20th century. On the basis of the recommendations of the Banking Enquiry Committee, the Reserve Bank of India Acts was passed in 1934. Accordingly the Reserve Bank of India was constituted in 1935 to regulate the issue of Bank notes, securing monetary stability in India and to operate the currency and credit system of the country to its economic development. Initially, RBI was constituted as a private shareholders bank with a fully paid up capital of Rs.5 crore. After independence, there was a general attitude towards its nationalization. Thus, the Reserve Bank of India (transferred to public ownership) Act was passed in 1948. Accordingly, the entire share capital of the bank was acquired by the Central Government from the Private Shareholders against compensation and it was nationalized on January 1, 1949. The total value of compensation paid by Government amounted to Rs.5.54 crore or Rs.118.63 per share of Rs.100 paid up. It is interesting to note that the paid up capital of Reserve Bank continues to remain at Rs.5 crore even now.

In 1955, the State Bank of India Act was passed. Accordingly the Imperial Bank was nationalized and State Bank of India emerged with the objective of extension of banking facilities on a large scale, specifically in the rural and semi-urban areas and for various other public purposes . In 1959, the State Bank of India (subsidiary banks) Act as passed by which the public sector banking was further extended. The following banks were made the subsidiaries of State Bank of India. 1. The State Bank of Bikaner 2. The State Bank of Jaipur 3. The State Bank of Indore 4. The State Bank of Mysore 5. The State Bank of Patiala 6. The State Bank of Hyderabad 7. The State Bank of Saurashtra 8. The State Bank of Travancore

In 1963, the first two banks were amalgamated under the name of The State Bank of Bikaner and Jaipur. In 1969, fourteen major Indian Commercial banks were nationalized. These banks are Allahabad Bank, Bank of Baroda, Bank of India, Canara Bank, Central Bank of India, Dena Bank, Indian Bank, Indian Overseas Bank, Punjab National Bank, Syndicate Bank, Union Bank of India, United Bank of India, United Commercial Bank and Vijaya Bank. And in 1980 six more banks were nationalised. These banks constitute the public sector banks while the other scheduled banks and non-scheduled banks are in the private sector. 1.5 SCHEDULED BANKS:

Scheduled Banks are those banks, which are listed, in the second schedule to the Reserve Bank of India Act, 1934. The banks satisfying the following conditions are only included in the second schedule. a. That the banks paid up capital plus free reserves are not less than Rs.5 lakh, and b. That the affairs of the bank are not conducted to the detrimental interest of the depositors. The Reserve Bank also has powers to de-schedule a bank, when the above-mentioned conditions are not satisfied. It may be noted that presently, the RBI has prescribed a minimum capital of Rs.100 crore for starting a new commercial bank. 1.6 FUNCTIONS OF COMMERCIAL BANKS: An important function of a commercial bank is to attract deposits from the public. Those who have cash balance but who want to keep them in a safe place, deposit the same with a bank. It accepts deposits from every class and from every sources and in all cases, without Exception, It undertakes to repay the money either in part or in full in legal tender Money.

The second major function of a commercial bank is to make loans and advances out of the money which comes to it from the public. Direct loans and advances are given to all types of persons particularly to businessman and investors against personal security. Gold and silver and other movable and immovable assets. The most common way of Lending is by overdraft facilities. These functions performed by commercial bank include the provision of safety vaults to keep valuable of customers in safe custody, acting as agents for its customers to buy and sell gold and silver and securities on their behalf, making and receiving payments on behalf of its depositors and issuing letters of credit and travelers cheques. 1.7 GROWTH OF COMMERCIAL BANKS:

The commercial banks especially public sector banks have drastically changed from their traditional money dealing business to innovative banking and sub severed their operations to the needs of nation building activities. It is rightly said that the Indian Banking has changed from class banking to mass banking. In recent years, there have been conscious reorientations of banking policy towards the attainment of social goals. The following has been the major shifts in the banking policy of the country. a. Urban to rural orientation b. Profit motive to mass Banking c. Class Banking to mass Banking d. Short-term finance to Development finance e. Security based lending to purpose oriented lending f. Self-interest to social perspective g. Cross selling h. Full Banking system