banking definitions

7/29/2019 Banking Definitions

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Banking


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Bank is a lawful organisation, which accepts

deposits that can be withdrawn on demand. It

also lends money to individuals and business

houses that need it.

Banks also render many other useful services like

collection of bills

payment of foreign bills

safe-keeping of jewellery and other valuable items

certifying the credit-worthiness of business


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Banks Vs Money lenders

Basis Banks Moneylenders

Entity Bank are organised

institutions

Moneylenders are

individuals

Activity Includes acceptance of

deposits and lending of

money

Usually dont include

acceptance of deposits

Clients General people and

Businesses

Agriculturists and poor

people

Security Tangible securities Jewellery, Land, etc

Process of recovery ofloans Flexible Rigid and Strict

Interest Rate Governed By RBI Not governed and Usually

high


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The role of banking in an Economy

It encourages savings habit amongst peopleand thereby makes funds available forproductive use

It acts as an intermediary between peoplehaving surplus money and those requiringmoney for various business activities

It facilitates business transactions throughreceipts and payments by cheques instead ofcurrency.


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It provides loans and advances to businessmen

for short term and long-term purposes.

It also facilitates import export transactions

It helps in national development by providing

credit to farmers, small-scale industries and self-

employed people as well as to large business

houses which lead to balanced economicdevelopment in the country

Raising the standard of living of people


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Types of Banks


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Central Bank

Defn - A bank which is entrusted with thefunctions of guiding and regulating the bankingsystem of a country is known as its Central bank Govt. Banker

Maintains deposits of all other banks and providesadvances to them

Advisor to other banks

Maintains records of govt incomes and expenses

Advices govt on monetary and credit policies Decides on Interest rates

Determines foreign exchange rates


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Commercial Banks

Defn- Commercial Banks are banking

institutions that accept deposits and grant

short-term, medium and long term loans and

advances to their customers


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Types of Commercial banks

Public sector banks - majority stake is held by theGovernment of India or Reserve Bank of India.

Ex SBI, Bank of Baroda, Dena Bank, etc

Private sector banks - majority of share capital of the

bank is held by private individuals, Registered ascompanies with limited liability

Ex J&Kbank, ICICI Bank, HDFC Bank, etc.

Foreign banks - registered and have their headquarters

in a foreign country but operate their branches in ourcountry,

Ex HSBC, Deutsche Bank, Citibank, etc.


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Development Banks

Provide funds for medium and long-termcapital for purchase of machinery andequipment, for using latest technology, or for

expansion and modernisation. Also undertake other development measures

like subscribing to the shares and debenturesissued by companies, in case of undersubscription of the issue by the public

Ex- IFCI, SFC, NHB, etc


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Co-operative Banks

People come together to jointly serve theircommon interest and form a co-operativesociety under the Co-operative Societies Act

When a co-operative society engages itself inbanking business it is called a Co-operativeBank

It has to obtain licence from RBI Functions under the overall supervision of the

Registrar, Co-operative Societies of the State


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Types of Co-operative Banks

Primary Credit Societies - The operations of each societyare restricted to a small area so that the members knoweach other and are able to watch over the activities of allmembers to prevent frauds. May be a town, or village orsmall areaEx- Nasik Merchant Cooperative Bank,

Central Co-operative Banks - These banks operate at thedistrict level having some of the primary credit societiesbelonging to the same district as their members Function as a link between the primary credit societies and state

co-operative banks

Ex- NDCC


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State Co-operative Banks - the apex co-

operative banks in all the states of the country

Regulation and monitoring the activities of

District and Primary cooperative banks

Ex - Maharashtra State cooperative Bank


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Specialised Banks

Specialised banks are foreign exchange banks,industrial banks, development banks, export-importbanks catering to specific needs of these uniqueactivities. These banks provide financial aid to

industries, heavy turnkey projects and foreign trade.

Banks which cater to the requirements and provideoverall support for setting up business in specific areasof activity

They engage themselves in some specific area oractivity and thus, are called specialised banks

Ex EXIM Bank, SIDBI, NABARD, etc


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Functions of Commercial Banks

The functions of commercial banks are of two

types.

(A) Primary functions

(B) Secondary functions


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Primary functions

Accepting deposits - Depending upon the

nature of deposits, funds deposited with bank

also earn interest

There is also safety of funds deposited with

the bank.


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Grant loans and advances

LOANS -

A loan is granted for a specific time period.Generally commercial banks provide short-termloans. But term loans, i.e., loans for more than ayear may also be granted.

The borrower may be given the entire amount inlump sum or in installments.

Loans are generally granted against the securityof certain assets.

A loan is normally repaid in installments.However, it may also be repaid in lump sum


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ADVANCESAn advance is a credit facility

provided by the bank to its customers for a

shorter period of time to meet day to day

expenses

Interest is charged only on the amount

withdrawn and not on the sanctioned amount


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Types of Advances

a) Cash Credit - Cash credit is an arrangementwhereby the bank allows the borrower to drawamount upto a specified limit

The amount is credited to the account of thecustomer.

The customer can withdraw this amount as andwhen he requires.

Interest is charged on the amount actuallywithdrawn.

Cash Credit is granted as per terms andconditions agreed with the customers


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b) Overdraft

Overdraft is also a credit facility granted by bank.

A customer who has a current account with the

bank is allowed to withdraw more than the

amount of credit balance in his account.

It is a temporary arrangement. Overdraft facility

with a specified limit may be allowed either onthe security of assets, or on personal security, or

both.


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c) Discounting of Bills

Banks provide short-term finance by discountingbills, that is, making payment of the amount

before the due date of the bills after deducting acertain rate of discount.

The party get the funds without waiting for thedate of maturity of the bills.

In case any bill is dishonoured on the due date,the bank can recover the amount from thecustomer.


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Secondary functions

Issuing letters of credit, travellers cheque, etc.

Undertaking safe custody of valuables, important

document and securities by providing safe

deposit vaults or lockers.

Providing customers with facilities of foreign

exchange dealings.

Transferring money from one account to another;and from one branch to another branch of the

bank through cheque, pay order, demand draft.


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Standing guarantee on behalf of its customers, formaking payment for purchase of goods, machinery,vehicles etc.

Collecting and supplying business information.

Providing reports on the credit worthiness ofcustomers.

Providing consumer finance for individuals by way ofloans on easy terms for purchase of consumer durableslike televisions, refrigerators, etc.

Educational loans to students at reasonable rate ofinterest for higher studies, especially for professionalcourses.


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Thank you

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