Fundamentals of Banking Essay Sample

The commercial Bankss serve as the king pin of the fiscal system of the state. They render many valuable services. The of import maps of the Commercial Bankss can be explained with the aid of the undermentioned chart. Primary Functions

The primary maps of the commercial Bankss include the undermentioned: A. Credence of Deposits
1. Time Deposits:
These are sedimentations repayable after a certain fixed period. These sedimentations are non withdrawn able by check. bill of exchange or by other agencies. It includes the followers. ( a ) Fixed Deposits: The sedimentations can be withdrawn merely after termination of certain period say 3 old ages. 5 old ages or 10 old ages. The banker allows a higher rate of involvement depending upon the sum and period of clip. Previously the rates of involvement payable on fixed sedimentations were determined by Reserve Bank. Presently Bankss are permitted to offer involvement as deter¬mined by each bank. However. Bankss are non permitted to offer different involvement rates to different clients for sedimentations of same adulthood period. except in the instance of sedimentations of Rs. 15 hundred thousand and above. These yearss the Bankss accept sedimentations even for 15 yearss or one month etc. In times of pressing demand for money. the bank allows premature closing of fixed sedimentations by paying involvement at reduced rate. Depositors can besides avail of loans against Fixed Depos¬its. The Fixed Deposit Receipt can non be transferred to other individuals. ( B ) Recuring Deposits:

In repeating sedimentation. the client opens an history and de¬posit a certain amount of money every month. After a certain period. state 1 twelvemonth or 3 old ages or 5 old ages. the accrued sum along with involvement is paid to the client. It is really helpful to the center and hapless subdivisions of the people. The involvement paid on such sedimentations is gener¬ally on cumulative footing. This sedimentation system is a utile mechanism for regular rescuers of money. ( hundred ) Cash Certificates:

Cash certifications are issued to the populace for a longer period of clip. It attracts the people because its adulthood value is in multiples of the amount
invested. It is an attractive and high giving up investing for those who can maintain the financess for a long clip. It is a really utile history for meeting future fiscal demands at the juncture of matrimony. instruction of kids etc. Cash certifications are by and large issued at price reduction to confront value. It means a hard currency certification of Rs. 1. 00. 000 collectible after 10 old ages can be pur¬chased now. state for Rs. 20. 000. 2. Demand Deposits:

These are the sedimentations which may be withdrawn by the deposi¬tor at any clip without old notice. It is withdraw able by cheque/draft. It includes the followers: ( a ) Savings Deposits: The nest eggs sedimentation promotes thrift among people. The nest eggs sedimentations can merely be held by persons and non-profit establishments. The rate of involvement paid on nest eggs sedimentations is lower than that of clip sedimentations. The nest eggs account holder gets the advantage of liquidness ( as in current a/c ) and little income in the signifier of involvements. But there are some limitations on backdowns. Corporate organic structures and concern houses are non allowed to open SB Accounts. Soon involvement on SB Accounts is determined by RBI. It is 4. 5 per cent per annum. Co-operative Bankss are allowed to pay an excess 0. 5 per cent on its nest eggs bank sedimentations. ( B ) Current Account Deposits:

These histories are maintained by the people who need to hold a liquid balance. Current history offers high liquidness. No involvement is paid on cur¬rent sedimentations and there are no limitations on backdowns from the current history. These histories are by and large in the instance of concern houses. establishments and co-operative organic structures. Nowadays. Bankss are planing and offering assorted investing strategies for sedimentation of money. These strategies vary from bank to bank. It may be stated that the Bankss are presently working out with different advanced strategies for sedimentations. Such sedimentation histories offer better involvement rate and at the same clip withdraw able installation besides. These strategies are largely offered by foreign Bankss. In USA. Current Histories are known as ‘Checking Accounts’ as a check is tantamount to look into in America. B. Advancing of Loans

The commercial Bankss provide loans and progresss in assorted signifiers. They are given below: 1. Overdraft:
This installation is given to holders of current histories merely. This is an ar¬rangement with the bankers thereby the client is allowed to pull money over and above the balance in his/her history. This installation of overdrawing his history is by and large pre-arranged with the bank up to a certain bound. It is a short-run impermanent fund installation from bank and the bank will bear down involvement over the sum overdrawn. This installation is by and large available to concern houses and companies. 2. Cash Recognition:

Cash recognition is a signifier of working capital recognition given to the concern houses. Under this agreement. the client opens an history and the canonic sum is credited with that history. The client can run that history within the canonic bound as and when required. It is made against security of goods. personal security etc. On the footing of operation. the period of recognition installation may be extended farther. One advantage under this method is that bank charges involvement merely on the sum utilised and non on entire sum sanctioned or credited to the history. Reserve Bank discourages this type of facil¬ity to concern houses as it imposes an uncertainness on money supply. Hence this method of loaning is easy phased out from Bankss and replaced by loan histories. Cash recognition sys¬tem is non in usage in developed states. 3. Discounting of Bills:

Discounting of Bills may be another signifier of bank recognition. The bank may buy inland and foreign measures before these are due for payment by the drawer debitors. at discounted values. i. e. . values a small lower than the face values. The Banker’s price reduction is by and large the involvement on the full sum for the unexpired period of the measure. The Bankss reserve the right of debiting the histories of the clients in instance the measures are ulti-mately non paid. i. e. . dishonored. The measure passes to the Banker after indorsement. Dis¬counting of measures by Bankss provide immediate finance to Sellerss of goods. This helps them to transport on their concern. Banks can dismiss merely echt commercial measures i. e. . those drawn against sale of goods on Credit. Banks will non dismiss Accommodation Bills. 4. Loans and Progresss:

It includes both demand and term loans. direct loans and progresss given to all type of clients chiefly to business communities and investors against per¬sonal security or goods of movable or immoveable in nature. The loan sum is paid in hard currency or by recognition to client history which the client can pull at any clip. The inter¬est is charged for the full sum whether he withdraws the money from his history or non. Short-run loans are granted to run into the working capital demands where as long-run loans are granted to run into capital outgo. Previously involvement on loan was besides regu¬lated by RBI. Currently. Bankss can find the rate themselves. Each bank is. nevertheless required to repair a minimal rate known as Prime Lending Rate ( PLR ) . Categorization of Loans and Progresss

Loans and progresss given by bankers can be classified loosely into the undermentioned classs: ( I ) Progresss which are given on the personal security of the debitor. and for which no tangible or indirect security is taken ; this type of progress is given either when the sum of the progress is really little. or when the borrower is known to the Banker and the Banker has complete assurance in him ( Clean Advance ) . ( two ) Progresss which are covered by touchable or indirect security. In this subdivision of the survey we are concerned with this type of progress and with different types of securities which a Banker may accept for such progresss ( Secured Advance ) . ( three ) Progresss which are given against the personal security of the debitor but for which the Banker besides holds in add-on the warrant of one or more sureties. This type of progress is frequently given by Banker to individuals who are non known to them but whose surety is known to the Banker. Bankers besides frequently take the per¬sonal warrant of the Directors of a company to whom they agree to progress a clean or unbarred loan. ( four ) Loans are besides given against the security of Fixed Deposit grosss. 5. Housing Finance:

Nowadays the commercial Bankss are viing among them¬selves in supplying lodging finance installations to their clients. It is chiefly to increase the lodging installations in the state. State Bank of India. Indian Bank. Canara Bank. Punjab National Bank. has formed lodging subordinates to supply lodging finance. The other Bankss are besides supplying lodging fundss to the populace. Government of India besides encour¬ages Bankss to supply equal lodging finance. Borrowers of lodging finance get revenue enhancement freedom benefits on involvement paid. Further lodging finance up to Rs. 5 hundred thousand is treated as precedence sector progresss for Bankss. The bound has been raised to Rs. 10 lakhs per borrower in metropoliss. 6. Educational Loan Scheme:

The Reserve Bank of India. from August. 1999 intro¬duced a new Educational Loan Scheme for pupils of full clip graduate/post-graduate professional classs in private professional colleges. Under the strategy all populace sector Bankss have been directed to supply educational loan up to Rs. 15. 000 for free place and Rs. 50. 000 for payment place pupil at involvement non more than 12 per cent per annum. This loan is on clean footing i. e. . without naming for security. This loan is available merely for stu¬dents whose one-year household income does non transcend Rs. 1. 00. 000. The loan has to be repaid together with involvement within five old ages from the day of the month of completion of the class. Surveies in regard of the undermentioned subjects/areas are covered under the strategy. ( a ) Medical and dental class.

( B ) Engineering class.
( degree Celsius ) Chemical Technology.
( vitamin D ) Management classs like MBA.
( vitamin E ) Law surveies.
( degree Fahrenheit ) Computer Science and Applications.
This apart. some of the Bankss have other educational loan strategies against security etc. . one can look into up the inside informations with the Bankss. 7. Loans against Shares/Securities: Commercial Bankss provide loans against the se¬curity of shares/debentures of reputed companies. Loans are normally given merely up to 50 % value ( Market Value ) of the portions subject to a maximal sum allowable as per RBI directives. Soon one can obtain a loan up to Rs. 10 hundred thousand against the physical portions and up to Rs. 20 hundred thousand against dematerialized portions. 8. Loans against Savings Certificates:

Banks are besides supplying loans up to certain value of nest eggs certifications like National Savings Certificate. Fixed Deposit Receipt. Indira Vikas Patra. etc. The loan may be obtained for personal or concern intents. 9. Consumer Loans and Progresss:

One of the of import countries for bank funding in recent old ages is towards purchase of consumer durable goodss like Television sets. Washing Machines. Micro Oven. etc. Banks besides provide broad Car finance. These yearss Bankss are viing with one another to impart money for these intents as default of payment is non high in these countries as the borrowers are normally salaried individuals holding regular income? Further. bank’s involvement rate is besides higher. Hence. Bankss improve their net income through such profit¬able loans. 10. Securitization of Loans:

Banks are late seeking to securities a portion of their portion of loan portfolio and sell it to another investor. Under this method. Bankss will change over their concern loans into a security or a papers and sell it to some Investment or Fund Manager for hard currency to heighten their liquidness place. It is a procedure of reassigning recognition hazard from the banker to the purchaser of securitized loans. It involves a cost to the banker but it helps the bank to guarantee proper recovery of loan. Consequently. securitization is the procedure of altering an illiquid plus into a liquid plus. 11. Others:

Commercial Bankss provide other types of progresss such as venture capital progresss. gem loans. etc. 1. Effective October 18. 1994 Bankss were free to find their ain premier loaning rates ( PLRs ) for recognition bound over Rs. 2 hundred thousand. Data relate to public sector Bankss. 2. The judicial admission of minimal adulthood period of term sedimentations was reduced from 30 yearss to 15 yearss. effectual April 29. 1998. Data relate to public sector Bankss. 3. The alteration in the Bank Rate was made effectual from the stopping point of concern of several day of the months of alteration except April 29. 1998. 4. Effective April 29. 1998.

C. Credit Creation
Credit creative activity is one of the primary maps of commercial Bankss. When a bank sanctions a loan to the client. it does non give hard currency to him. But. a sedimentation history is opened in his name and the sum is credited to his history. He can retreat the money whenever he needs. Thus. whenever a bank sanctions a loan it creates a sedimentation. In this manner the bank increases the money supply of the economic system. Such maps are known as recognition creative activity. Secondary Functions

The secondary maps of the Bankss consist of bureau maps and general public-service corporation maps. A. Agency Functions
Agency maps include the followers:
( I ) Collection of checks. dividends. and involvements:
As an agent the bank collects checks. bill of exchanges. promissory notes. involvement. dividends etc. . on behalf of its clients and recognition the sums to their histories. Customers may supply their bank inside informations to corporate where investing is made in portions. unsecured bonds. etc. As and when dividend. involvement. is due. the companies straight send the warrants/cheques to the bank for recognition to client history. ( two ) Payment of rent. insurance premiums:

The bank makes the payments such as rent. insurance premiums. subscriptions. on standing instructions until farther notice. Till the order is revoked. the bank will go on to do such payments on a regular basis by debiting the customer’s history. ( three ) Covering in foreign exchange:

As an agent the commercial Bankss purchase and sell foreign exchange every bit good for clients as per RBI Exchange Control Regulations. ( four ) Purchase and sale of securities:
Commercial Bankss undertake the purchase and sale of different securities such as portions. unsecured bonds. bonds etc. . on behalf of their clients. They run a separate ‘Portfolio Management Scheme’ for their large clients. ( V ) Act as legal guardian. executor. lawyer. etc:

The Bankss act as executors of Will. legal guardians and lawyers. It is safe to name a bank as a legal guardian than to name an person. Acting as lawyers of their clients. they receive payments and mark transportation workss of the belongingss of their clients. ( six ) Act as letter writer:

The commercial Bankss act as a letter writer of their clients. Small Bankss even get travel tickets. book vehicles ; receive letters etc. on behalf of the custom¬ers. ( seven ) Preparations of Income-Tax returns:

They prepare income-tax returns and supply advices on revenue enhancement affairs for their clients. For this intent. they employ revenue enhancement experts and do their services. available to their clients. B. General Utility Services

The General public-service corporation services include the followers:
( I ) Safety Locker installation:
Safekeeping of of import paperss. valuables like gems are one of the oldest services provided by commercial Bankss. ‘Lockers’ are little receptacles which are fitted in steel racks and kept indoors strong suites known as vaults. These cabinets are available on semiannual or one-year rental footing. The bank simply provides cabinets and the key but the valuables are ever under the control of its users. Any client can non hold entree to vault. Lone clients of safety cabinets after come ining into a registry his name history figure and clip can come in into the vault. Because the vault is keeping of import valuables of clients in cabinets. it is besides known as ‘Strong Room’ . ( two ) Payment Mechanism or Money Transportation:

Transportation of financess is one of the of import maps performed by commercial Bankss. Checks and recognition cards are two of import payment mechanisms through Bankss. Despite an addition in fiscal minutess. Bankss are pull offing the transportation of financess process really expeditiously. Checks are besides cleared through the banking system. Correspondent banking is another method of reassigning financess over long distance. normally from one state to another. Banks. these yearss employ computing machines to rush up money transportation and to cut down cost of reassigning financess. Electronic Transportation of financess is besides known as ‘Chequeless banking’ where financess are transferred through computing machines and sophisticated electronic system by utilizing codification words. They offer Mail Transfer. Telegraphic Transfer ( TT ) installation besides. ( three ) Travelers’ checks:

Travelers Checks are used by domestic travellers every bit good as by international travellers. However the usage of traveler’s checks is more common by interna¬tional travellers because of their safety and convenience. These can be besides termed as a modi¬fied signifier of traveler’s missive of recognition. A bank publishing travellers checks normally have banking agreement with many of the foreign Bankss abroad. known as analogous Bankss. The buyer of traveler’s checks can incase the checks from all the abroad Bankss with whom the publishing bank has such an agreement. Thus traveler’s checks are non drawn on specific bank abroad. The checks are issued in foreign currency and in convenient denominations of 10. 20. 50. one hundred dollar. etc. The signature of the buyer/traveler is written on the face of the checks at the clip of their purchase. The checks besides provide clean infinite for the signature of the traveller to be signed at the clip of encashment of each check.

A traveller has to subscribe in the clean infinite at the clip of pulling money and in the presence of the paying banker. The paying banker will pay the money merely when the signature of the traveller runs with the signature already available on the check. A traveller should ne’er subscribe the check except in the presence of paying banker and merely when the traveller desires to encash the check. Otherwise it may be misused. The checks are besides accepted by hotels. eating houses. stores. air hoses companies for respectable individuals. Encashment of a traveller check abroad is equivalent to a foreign exchange dealing as it involves transition of domestic currency into a foreign currency. When a traveler check is lost or stolen. the purchaser of the checks has to give a notice to the publishing bank so that stop order can be issued against such lost/stolen checks to the Bankss where they are permitted to be encased. It is besides hard to the finder of the check to pull hard currency against it since the encasher has to subscribe the check in the presence of the paying banker. Fresh travelers checks can be surrendered to the publishing bank and balance of hard currency obtained. The publishing bank levies certain committee depending upon the figure and value of travelers checks issued. ( four ) Round Notes or Round Letterss of Recognition:

Under Circular Letters of Credit. the cus¬tomer/traveller negotiates the bill of exchanges with any of the assorted subdivisions to which they are addressed. Thus the traveler can obtain financess from many of the subdivisions of Bankss alternatively merely from a peculiar subdivision. Round Letterss of Credit are hence a more utile method for obtaining financess while going to many states. It may be noted that travelers missive of recognition are normally paid for in progress. In other words. the traveler first makes payments to the publishing bank before obtaining the Round Notes. ( V ) Issue “Travellers Cheques” :

Banks issue travelers cheques to assist transport money safely while going within India or abroad. Therefore. the clients can go without fright. larceny or loss of money. ( six ) Letters of Credit: Letter of Credit is a payment papers provided by the buyer’s banker in favor of marketer. This papers guarantees payment to the marketer upon production of papers mentioned in the Letter of Credit attesting despatch of goods to the purchaser. The Letter of Credit is an confidence of payment upon carry throughing conditions mentioned in the Letter of Credit. The missive of recognition is an of import method of payment in international trade. There are chiefly 4 parties to a missive of recognition. The purchaser or importer. the bank which issues the missive of recognition. known as opening bank. the individual in whose favour the missive of recognition is issued or opened ( The marketer or exporter. known as ‘Beneficiary of Letter of Credit’ ) . and the recognition receiving/advising bank. The Letter of Credit is by and large advised/sent through the seller’s bank. known as Negotiating or Advising bank. This is done because the conditions mentioned in the Letter of Credit are. in the first case ; hold to be verified by the Negotiat¬ing Bank. It is largely used in international trade. ( seven ) Acting as Referees:

The Bankss act as referees and supply information about the concern minutess and fiscal standing of their clients on questions made by 3rd parties. This is done on the credence of the clients and aid to increase the concern activity in general. ( eight ) Provides Trade Information:

The commercial Bankss collect information on concern and fiscal conditions etc. . and do it available to their clients to assist be after their scheme. Trade information service is really utile for those clients traveling for cross-border concern. It will assist bargainers to cognize the exact concern conditions. payment regulations and buyers’ fiscal position in other states. ( nine ) ATM installations:

The Bankss today have ATM installations. Under this system the custom¬ers can retreat their money easy and rapidly and 24 hours a twenty-four hours. This is besides known as ‘Any Time Money’ . Customers under this system can retreat financess i. e. . currency notes with a aid of certain magnetic card issued by the bank and similarly sedimentation cash/cheque for recognition to account. ( x ) Credit cards:

Banks have introduced recognition card system. Credit cards enable a cus¬tomer to buy goods and services from certain specified retail and service constitutions up to a bound without doing immediate payment. In other words. purchases can be made on recognition footing on the strength of the recognition card. The constitutions like Hotels. Shops. Airline Companies. Railways etc. . which sell the goods or services on recognition frontward a monthly or biweekly statements to the bank. The sum is paid to these constitutions by the bank. The bank later collects the dues from the clients by debit to their histories. Usu¬ally. the bank receives certain service charges for every recognition card issued. Visa Card. BOB card are some illustrations of recognition cards. ( eleven ) Gift Checks:

The commercial Bankss offer Gift check installations to the general populace. These checks received a wider credence in India. Under this system by paying tantamount sum one can purchase gift check for presentation on occasions like Wedding. Birthday. ( twelve ) Accepting Bills:

On behalf of their clients. the Bankss accept measures drawn by 3rd parties on its clients. This resembles the missive of recognition. While Bankss accept measures. they provide a better security for payment to seller of goods or drawer of measures. ( thirteen ) Merchant Banking:

The commercial Bankss provide valuable services through their merchandiser banking divisions or through their subordinates to the bargainers. This is the map of underwriting of securities. They underwrite a part of the Public issue of portions. Deben¬tures and Bonds of Joint Stock Companies. Such underwriting ensures the expected mini¬mum subscription and besides convey to the puting populace about the quality of the company publishing the securities. Presently. this type of services can be provided merely by separate subordinates. known as Merchant Bankers as per SEBI ordinances. ( fourteen ) Advice on Fiscal Matters:

The commercial Bankss besides give advice to their custom¬ers on fiscal affairs peculiarly on investing determinations such as enlargement. diversifica¬tion. new ventures. rise of financess etc. ( fifteen ) Factoring Service:

Today the commercial Bankss provide factoring service to their clients. It is really much helpful in the development of trade and industry as immediate hard currency flow and disposal of debtors’ histories are taken attention of by factors. This service is once more provided merely by a separate subordinate as per RBI ordinances. Balance sheet is a statement of assets and liabilities on a given day of the month. In India. Bankss have to print their balance sheets harmonizing to the preformed i. e. . ‘Form A’ given in the III sched¬ule of the Banking Regulation Act. 1949. The survey of the balance sheet along with its net income and loss history reveals its fiscal soundness.