Module 2

Banking in India
Pre-Independence Era:

The first bank in India was the Bank of Hindustan, established in 1770.

The General Bank of India was set up in 1786 but failed in 1791.

The Presidency Banks: Bank of Bengal (1806), Bank of Bombay (1840), and Bank of Madras
(1843) were established and later merged to form the Imperial Bank of India in 1921, which
became the State Bank of India (SBI) in 1955.

Post-Independence Era:

In 1949, the Banking Regulation Act was enacted, giving the Reserve Bank of India (RBI)
control over the banking sector.

Nationalization: In 1969, 14 major commercial banks were nationalized, followed by six more in
1980, increasing the role of public sector banks.

Bank meaning
A "bank" is a financial institution that offers various services including accepting deposits,
providing loans, facilitating currency exchange, and managing financial transactions for
individuals, businesses, and governments. Banks play a crucial role in the financial system by
ensuring liquidity, enabling payment processing, and offering investment products.

Need for Banking

A sound banking system is necessary to achieve the following objectives:

1. Savings and Capital Formation; Banks play a vital role in mobilizing the savings of the
people and promoting the capital formation for the economic development of a country,

2. Channelization of Savings: The mobilized savings are allocated by the banks for the
development of various fields such as agriculture, industry, communication, transport, etc.
3. Implementation of Monetary Policy: A structured banking system can easily implement the
monetary policy because development of the economy depends upon the control of credit given
by the banks. So, banks are necessary for the effective implementation of monetary policies.

4. Encouragement of Industries: Banks provide various types of financial services such as

granting cash credit loans, issuing letter of credit, bill discounting, etc., which encourages the
development of various industries in the country.

5. Regional Development: By transferring surplus money from the developed regions to the less
developed regions, banks reduce regional imbalances.

6. Development of Agriculture and Other Neglected Sectors: Banks are necessary for the
farmers. It also encourages the development of small-scale and cottage industries in rural areas.

Functions of banks
1.Accepting Deposits: Banks accept money from customers in the form of deposits, such as
savings accounts, current accounts, and fixed deposits.

2.Making Loans: Banks provide loans to customers for various purposes, such as buying a
house, starting a business, or financing education.

3.Money Transfer: Banks enable customers to transfer money from one account to another
through services like checks, demand drafts, and online transfers.

4.Providing Credit: Banks issue credit cards, overdraft facilities, and other credit instruments to
customers.

5.Investment Services: Banks offer investment products like fixed deposits, recurring deposits,
and savings certificates.

6.Locker Facilities: Banks provide safe deposit lockers for customers to store valuable items
like jewelry, documents, and cash.

7.Foreign Exchange Services: Banks facilitate foreign exchange transactions, such as buying
and selling foreign currencies.

8.Customer Services: Banks offer various customer services, including account management,
statement generation, and debit card services.
Bank deposits
Bank deposits refer to funds that customers place into a bank account. These deposits form the
primary source of funds for banks, which they use to provide loans and other financial services.

Types of bank deposit

1. Demand Deposit:

Demand deposits are funds held in accounts that allow for immediate access and withdrawal by
the account holder without any advance notice to the bank.

Features:

 Liquidity: Highly liquid, meaning funds can be accessed at any time.

 Interest: Typically earns little to no interest compared to other types of accounts.
 Usage: Ideal for everyday transactions, bill payments, and short-term savings.
 Access: Funds can be accessed through checks, ATMs, debit cards, and electronic
transfers.

Examples:

 Checking Accounts: Most common type of demand deposit, providing unlimited access
to funds.
 Savings Accounts: Though traditionally considered a demand deposit, savings accounts
may have some limitations on the number of withdrawals per month.

2. Time Deposit:

Time deposits are funds placed in an account for a fixed term or period, during which the
depositor agrees not to withdraw the funds. In return, these accounts typically offer higher
interest rates compared to demand deposits.

Features:

 Fixed Term: Requires the depositor to keep the money in the account for a
predetermined period (e.g., 6 months, 1 year, 5 years).
 Interest: Offers higher interest rates due to the fixed term of the deposit.
 Penalties: Early withdrawal usually incurs a penalty or loss of interest.
 Usage: Suitable for long-term savings goals where the depositor does not need immediate
access to funds.

Examples:
  Certificates of Deposit (CDs): A common type of time deposit where the interest rate
and term are fixed at the time of deposit.
 Fixed Deposits: Similar to CDs, but the terminology and specific conditions may vary
depending on the country or financial institution.

Comparison between demand deposit and time deposit:

 Liquidity: Demand deposits offer high liquidity with immediate access, while time
deposits have low liquidity due to the fixed term and penalties for early withdrawal.
 Interest Rates: Demand deposits typically offer lower interest rates, whereas time
deposits offer higher rates to compensate for the lack of liquidity.
 Usage: Demand deposits are used for everyday transactions and short-term savings, while
time deposits are used for long-term savings and investment purposes.

Types of bank account

1. Savings Account

A savings account is a deposit account held at a bank or other financial institution that provides a
modest interest rate. It is primarily intended for money that you don’t need immediately but want
to keep safe and earn interest on.

Features:

 Interest: Earns interest, typically at a lower rate than fixed deposits but higher than
current accounts.
 Liquidity: Provides easy access to funds, though there may be a limit on the number of
withdrawals per month.
 Safety: Insured by the government (e.g., FDIC in the US, DICGC in India) up to a certain
amount.
 Minimum Balance: May require maintaining a minimum balance to avoid fees.

2. Current Account

A current account, also known as a checking account, is a type of deposit account designed for
frequent transactions. It is typically used by businesses and individuals who make numerous
transactions.

Features:

 Transaction Limit: Unlimited transactions including deposits, withdrawals, and

transfers.
 Interest: Usually does not earn interest or earns very low interest.
 Overdraft Facility: Often offers an overdraft facility, allowing account holders to
withdraw more than their balance up to a certain limit.
  Fees: May have higher fees and charges compared to savings accounts.

3. Recurring Deposit (RD) Account

A recurring deposit (RD) account is a type of term deposit offered by banks that allows
customers to deposit a fixed amount regularly (usually monthly) for a predetermined period.

Features:

 Regular Deposits: Fixed monthly deposits for a specified term.

 Interest: Earns interest at a fixed rate, which is usually higher than savings accounts.
 Term: The deposit term ranges from 6 months to 10 years.
 Maturity: At maturity, the depositor receives the principal amount along with the
accumulated interest.

4. Fixed Deposit (FD) Account

A fixed deposit (FD) account is a type of term deposit where a lump sum amount is deposited for
a fixed period at a predetermined interest rate.

Features:

 Lump Sum Deposit: Requires a one-time deposit of a lump sum amount.

 Interest: Offers a higher interest rate than savings and current accounts.
 Term: The deposit term can range from a few months to several years.
 Premature Withdrawal: Early withdrawal is possible but usually incurs a penalty.

5. DEMAT Account

A DEMAT (Dematerialized) account is an account that allows investors to hold and trade
securities in electronic form, eliminating the need for physical share certificates.

Features:

 Electronic Holdings: Securities are held in electronic form.

 Ease of Trading: Facilitates easy and quick transfer of securities.
 Safety: Reduces the risk of theft, loss, or damage to physical certificates.
 Corporate Benefits: Enables automatic credit of dividends, interest, and bonuses.

6. Non-Resident Indian (NRI) Accounts

NRI accounts are specialized bank accounts for Indians residing abroad. These accounts are
designed to manage income earned abroad and in India, offering various benefits and tax
implications.

Types:
  NRE (Non-Resident External) Account:
o Currency: Held in Indian Rupees (INR).
o Repatriation: Fully repatriable, allowing funds to be transferred back to the
resident country.
o Taxation: Interest earned is tax-free in India.
o Usage: Ideal for income earned abroad.
 NRO (Non-Resident Ordinary) Account:
o Currency: Held in Indian Rupees (INR).
o Repatriation: Funds can be repatriated within certain limits.
o Taxation: Interest earned is subject to Indian taxes.
o Usage: Used to manage income earned in India (e.g., rent, dividends).
 FCNR (Foreign Currency Non-Resident) Account:
o Currency: Held in foreign currency (e.g., USD, GBP, EUR).
o Repatriation: Fully repatriable.
o Taxation: Interest earned is tax-free in India.
o Usage: Protects against currency fluctuations.

Reserve Bank of India

The Reserve Bank of India (RBI) is the central bank of India, established on April 1, 1935, in
accordance with the Reserve Bank of India Act, 1934. It plays a pivotal role in the Indian
economy, controlling the monetary policy and ensuring financial stability. Initially, it was
privately owned, but it was nationalized in 1949, becoming a government-owned entity.

Functions of the RBI

1.Monetary Authority

The RBI controls inflation, stabilizes currency, and promotes economic growth by adjusting
interest rates and regulating the money supply.

2.Regulator and Supervisor of the Financial System

The RBI issues licenses, sets banking regulations, and supervises the operations of banks to
ensure their soundness and stability.

3.Issuer of Currency
The RBI has the sole authority to issue banknotes in India, ensuring the adequate supply of clean
and genuine notes.

4.Developmental Role

Directing credit towards critical sectors of the economy, such as agriculture, small-scale
industries, and housing.

5. Banker to the Government

- Acts as a banker to the central and state governments

- Manages government accounts, receipts, and payments

6. Bankers' Bank

- Provides loans and advances to commercial banks

- Acts as a lender of last resort during financial difficulties

Deposit insurance
Deposit insurance is a protection scheme provided by the government or a specialized agency to
safeguard depositors' funds in banks. It ensures that, in the event of a bank failure, depositors are
compensated up to a certain limit, thereby maintaining public confidence in the banking system
and ensuring financial stability.

Features of the deposit insurance system in India include:

 Coverage Limit: The DICGC insures all bank deposits, such as savings, fixed, current,
and recurring deposits, up to a maximum of 5 lakh per depositor per bank.
 Eligible Banks: The scheme covers all commercial banks, including branches of foreign
banks functioning in India, local area banks, regional rural banks, and cooperative banks.
 Automatic Coverage: Depositors do not need to apply for insurance as coverage is
automatic upon opening an account in an insured bank.
 Compensation: In the event of a bank failure, the DICGC compensates the insured
amount to the depositors through the liquidator appointed by the bank.
PRADHAN MANTRI JAN DHAN YOJANA (PMJDY)
The Pradhan Mantri Jan Dhan Yojana (PMJDY) is a national financial inclusion program
launched by the Government of India in August 2014. It aims to provide affordable access to
financial services, such as bank accounts, credit, insurance, and pensions, to all sections of
society, particularly the underserved and unbanked population.

Scheme Details

Pradhan Mantri Jan-Dhan Yojana (PMJDY) is National Mission for Financial Inclusion to ensure
access to financial services, namely, a basic savings & deposit accounts, remittance, credit,
insurance, pension in an affordable manner. Under the scheme, a basic savings bank deposit
(BSBD) account can be opened in any bank branch or Business Correspondent (Bank Mitra)
outlet, by persons not having any other account.

Features of PMJDY include:

Zero-Balance Accounts: Under PMJDY, individuals can open a basic savings bank deposit
account with no requirement to maintain a minimum balance. However, accounts with a balance
receive interest.

RuPay Debit Card: Account holders are issued a RuPay debit card, which comes with an inbuilt
accident insurance cover of ₹1 lakh (increased to 2 lakh for accounts opened after 28 August
2018),

Overdraft Facility: After six months of satisfactory operation, account holders are eligible for
an overdraft facility of up to 10,000.

Life Insurance Cover: A life insurance cover of ₹30,000 is provided to eligible account holders
who opened accounts between 15 August 2014 and 31 January 2015.

Direct Benefit Transfer (DBT): PMJDY facilitates the direct transfer of subsidies and other
benefits from the government to the beneficiaries accounts, promoting transparency and reducing
leakages.

Financial Literacy: The scheme emphasizes financial literacy and awareness to help people
make informed financial decisions and effectively use financial services.

Mobile Banking: PMJDY promotes mobile banking to provide easy access to banking services,
especially in rural and remote areas.
Coverage: The scheme aims to cover all households in India. Special focus is given to women,
with a significant number of accounts being opened in their names.

Benefits under PMJDY

a. One basic savings bank account is opened for unbanked person.

b. There is no requirement to maintain any minimum balance in PMJDY accounts.

c. Interest is earned on the deposit in PMJDY accounts.

d. Rupay Debit card is provided to PMJDY account holder.

e. Accident Insurance Cover of Rs.1 lakh (enhanced to Rs. 2 lakh to new PMJDY accounts
opened after 28.8.2018) is available with RuPay card issued to the PMJDY account
holders.

f. An overdraft (OD) facility up to Rs. 10,000 to eligible account holders is available.

g. PMJDY accounts are eligible for Direct Benefit Transfer (DBT), Pradhan Mantri Jeevan
Jyoti Bima Yojana (PMJJBY), Pradhan Mantri Suraksha Bima Yojana (PMSBY), Atal
Pension Yojana (APY), Micro Units Development & Refinance Agency Bank (MUDRA)
scheme.

Banking models
The banking industry has undergone significant transformation over the years, shifting from traditional
models to modern, technology-driven models.

Traditional Banking Model

1. Physical Branches: Traditional banks primarily operate through physical branches where
customers perform transactions in person.
2. Face-to-Face Interaction: Emphasis on personal interaction with bank staff for services like
opening accounts, applying for loans, and customer service.
3. Manual Processes: Many processes are manual, involving paperwork and physical signatures.
4. Limited Banking Hours: Services are available during set hours, typically weekdays with
limited hours on weekends.
5. Traditional Products: Offerings include savings and checking accounts, fixed deposits, loans,
and credit cards.

Modern Banking Model

 1. Digital and Online Platforms: Banks leverage online platforms, mobile apps, and ATMs for
most transactions and services.
2. 24/7 Access: Customers can access banking services anytime and anywhere through digital
platforms.
3. Automated Processes: Use of technology to automate processes like account opening, loan
applications, and customer service (e.g., chatbots).
4. Innovative Products: Includes digital wallets, peer-to-peer payments, and integration with other
financial services like investment and insurance.
5. Data-Driven Insights: Utilization of big data and analytics to offer personalized financial advice
and targeted products.

Debit Card and Credit Card

Debit Card:

A debit card is a payment card that deducts money directly from a consumer's checking account
to pay for a purchase. It allows users to spend only the funds available in their account, providing
a direct link to their bank balance.

Credit Card:

A credit card is a payment card that allows consumers to borrow funds from a pre-approved limit
to pay for purchases. Users repay the borrowed amount, usually with interest, and can build or
impact their credit score based on their payment behavior.

1. Internet Banking

Internet banking, also known as online banking, enables customers to perform financial
transactions through a bank's website.

NEFT (National Electronic Funds Transfer)

 Function: Facilitates one-to-one funds transfer from one bank account to another.
 Process: Operates in half-hourly batches. The funds are transferred from the remitter’s account to
the beneficiary’s account through a series of bank processes.
 Availability: Transactions can be initiated 24/7, but are processed during business hours in half-
hourly batches.
 Settlement: Funds are usually credited within a few hours on the same day or the next business
day.
 Limitations: No minimum or maximum transaction limit, but individual banks may impose
limits.
RTGS (Real-Time Gross Settlement)

 Function: Enables the real-time transfer of large amounts of money.

 Process: Funds are transferred immediately and settled on an order-by-order basis.
 Availability: Transactions can be initiated during RTGS business hours (typically from 7:00 AM
to 6:00 PM on weekdays, subject to bank timings).
 Settlement: Immediate settlement, typically within 30 minutes.
 Limitations: Minimum transaction amount is ₹2 lakhs; no upper limit.

IMPS (Immediate Payment Service)

 Function: Provides instant interbank electronic fund transfer service through mobile phones and
other channels.
 Process: Funds are transferred immediately using the recipient's mobile number and MMID
(Mobile Money Identifier) or account number and IFSC code.
 Availability: 24/7, including weekends and public holidays.
 Settlement: Immediate.
 Limitations: Transaction limits vary by bank; typically, the upper limit is ₹2 lakhs per
transaction.

2. Mobile Banking

Mobile banking allows customers to perform banking activities through their mobile devices,
such as smartphones and tablets.

 Functions: Includes balance inquiry, fund transfer, bill payment, mobile recharge, and more.
 Applications: Banks offer dedicated mobile apps that provide a user-friendly interface for
conducting various banking operations.
 Security: Features include multi-factor authentication (MFA), encryption, and secure login
credentials.

3. Mobile Wallets

Mobile wallets store payment card information on a mobile device and facilitate digital
payments.

 Examples: Paytm, Google Pay, PhonePe, Apple Pay, Samsung Pay.

 Functions: Users can load money into the wallet and use it for a variety of transactions, such as
paying bills, transferring money, and making purchases.
 Advantages: Convenience, speed, and the ability to handle multiple payment methods.
 Security: PINs, biometrics, and tokenization to protect user information.

4. AEPS (Aadhaar Enabled Payment System)

AEPS allows banking transactions using Aadhaar number and biometric authentication.

 Function: Enables transactions such as balance inquiry, cash deposit, cash withdrawal, and fund
transfer using Aadhaar number.
  Usage: Particularly beneficial in rural areas where traditional banking infrastructure is limited.
 Security: Uses biometric authentication, ensuring secure and fraud-free transactions.

5. UPI (Unified Payments Interface)

UPI is a real-time payment system that integrates multiple bank accounts into a single mobile
application.

 Function: Facilitates instant money transfer between bank accounts through a mobile platform.
 Process: Users create a UPI ID linked to their bank account. Payments can be made using the
recipient's UPI ID, mobile number, or QR code.
 Availability: 24/7, including public holidays.
 Settlement: Instant.
 Advantages: Seamless, fast, and easy to use for both P2P (peer-to-peer) and P2M (person-to-
merchant) transactions.
 Security: UPI PIN, device binding, and multifactor authentication ensure high levels of security.