Assam Board (ASSEB-AHSEC) Class 11 Finance Unit-3: Commercial Banking In India Important Questions and Answers for the 2025 Examination. These notes and important questions and answers, prepared by The Treasure Notes, are helpful for your exam preparation.
UNIT-3: Commercial Banking In India
Chapter-7; Evolution And Growth Of Bank In India
1. Write a brief note on Evolution and Growth of Banking in India.
Ans: The word Bank has been originated from many words. There is no single word or answer to this origin of the word 'Bank'. According to some economists, the word 'Bank' has been originated from the German word 'Banck' which means heap or mound or joint stock fund. From this, the Italian word 'Banco' has been derived. It means heap of money. But according to this group, the word bank is derived from the Greek word 'Banque' which mean 'a bench'. It refers to a place where money-lenders and money changers used to sit and display their coins and transact business.
Thus the origin of the word 'Bank' can be traced as follows.
Bank-Banco-Banque-Bank
Banking industry in India has a long history. It has travelled a long path to assume its present form.
This journey can be divided into three different time periods.
1. Ancient Period:
a) Vedic Period: The roots of Indian banking trace back to antiquity. Hindu scriptures from the Vedic period mention money lending activities. During the times of the Ramayana and Mahabharata, banking evolved into a fully-fledged enterprise.
b) Smrity Period: In the Smrity period, banking was predominantly conducted by members of the Vaish community. Authoritative records of credit and lending activities date as far back as 2000-1400 B.C. These early banks performed functions akin to contemporary commercial banks, encompassing deposit acceptance, lending, acting as the state's bankers and managing state currency
2. Pre-Independence Period: During the pre-independence period, the banking landscape was primarily composed of money lenders, indigenous banks, nidhis and loan offices. Some of these institutions continue to persist in rural and semi-urban areas.
a) The Bank of Hindustan: Modern-style banking in India and the expanding trade connections with English merchants led to the emergence of banking in the late 18th century. 'Alexander and Company' established The Bank of Hindustan' in 1770, although the Central Banking Enquiry Committee traces the first bank back to The First Bank of Madras' established in 1683.
b) Presidency Banks: The advent of modern commercial banking in India commenced with the establishment of the first Presidency Bank, the Bank of Bengal (then Bank of Calcutta), in Calcutta in 1806. It was initially a joint stock bank with limited liability, later incorporated under a Royal Charter in 1809 and renamed Bank of Bengal. Subsequently, two more Presidency Banks were established in Bombay and Madras in 1840 and 1843, respectively.
c) The Joint Stock Companies Act, 1850: In India, the Joint Stock Companies Act of 1850 marked the first legislative enactment that allowed corporate entities to enter the banking sector. This Act facilitated the establishment of numerous commercial banks, with the Oudh Commercial Bank founded in 1881, followed by Punjab National Bank in 1885 and People's Bank in 1901.
d) Swadesi Movement (1905): The Swadesi movement in 1905 saw the emergence of numerous banks, including Bank of India, Central Bank of India, Bank of Baroda, Punjab and Sind Bank and Indian Bank.
e) Imperial Bank of India: In 1921, the three Presidency Banks, namely the Bank of Bengal, Bank of Bombay, and Bank of Madras, were amalgamated to form a single entity, the Imperial Bank of India, under the Imperial Bank of India Act, 1920
f) Reserve Bank of India: During this period, the Reserve Bank of India (RBI) was established in 1935 as the central bank of India under the RBI Act, 1934.
3. Post-Independence Period: The post-independence period witnessed substantial growth in the Indian banking system. The banking sector faced challenges in the first half of the 20th century, but since India's independence in 1947, remarkable progress has been recorded. This growth can be attributed to planned economic development, increased money supply, the proliferation of banking habits, and the regulatory guidance provided by the RBI.
a) Nationalization of Reserve Bank of India: The nationalization of the Reserve Bank of India took place on January 1, 1949, under the Reserve Bank of India (Transfer to Public Ownership) Act, 1948. This event marked a significant milestone in the post-independence banking industry.
b) The Banking Companies Act, 1949: In 1949, the Banking Companies Act was enacted to ensure balanced growth and safeguard the interests of depositors. This act was later renamed the Banking Regulation Act, 1949, in 1966. By 1950-51, India had 430 commercial banks, but the number declined due to the RBI's policy of merging and amalgamating small banks with larger ones to strengthen the banking system.
c) Formation of State Bank of India: In 1955, the Imperial Bank of India, established in 1921, was nationalized and renamed the State Bank of India The State Bank of India (Subsidiary Bank) Act of 1959 empowered SBI to acquire eight princely state-associated banks as subsidiaries.
d) Social Control: In 1968, the government introduced the scheme of social control to ensure the equitable distribution of bank credit
e) Nationalization of Commercial Banks: A significant structural transformation occurred after the nationalization of 14 major commercial banks in 1969. In 1980, sıx additional commercial banks were taken over by the government. Over the last five decades of nationalization, commercial banks, especially in terms of branch networks in under-banked rural areas, experienced tremendous growth.
f) Establishment of Regional Rural Banks: In 1975, a new category of banks called Regional Rural Banks (RRBs) was established with a focus on rural and agricultural development A large number of RRBs were established through joint efforts of the central government, sponsoring commercial banks and state governments.
g) Licensing of Private Sector Banks: Following the nationalization in 1969, a hiatus of over two decades in the establishment of private sector banks ended. In alignment with the recommendations of the Narasimham Committee, the RBI was empowered to issue licenses to private sector banks as part of the liberalization process.
h) Various Financial Institutions: In addition to these developments, various financial institutions were established to cater to specialized financial needs. These institutions include IDBI, ICICI, SIDCS, SIDBI, IRBI, NABARD, LDBS, EXIM Bank, ECGC, NHB, DFHIL, LIC, GIC, UTI, among others. The establishment of these institutions has elevated the Indian Banking System to a level comparable to the finest banking systems worldwide
2. Discuss the formation Presidency Banks and its Governance and Operations.
Ans: The foundation for modern banking in India was established by the East India Company during the first half of the 19th century.
The following three banks were established, which are known as 'Presidency Banks"
a Bank of Bengal in 1806
b. Bank of Bombay in 1840
c. Bank of Madras in 1843
Note: The Bank of Calcutta (founded on 2 June 1806) and was renamed Bank of Bengal on 2 January 1809.
Bank of Bengal (1809): The Bank of Bengal was established in 1809. It laid the foundation for modern banking in India. Originally, it started as The Bank of Calcutta in 1806, but in 1809, it was officially renamed The Bank of Bengal through a Royal Charter It was the first joint-stock bank in British India, sponsored by the Government of Bengal With a capital of Rs. 50 lakhs, of which one fifth was contributed by the government, this institution marked a significant milestone. However, the authority to issue currency notes was granted in 1823, and the bank gained the power to open branches and engage in inland exchange activities in 1939.
Bank of Bombay (1840) and Bank of Madras (1843): Following the establishment of the Bank of Bengal, two more significant institutions were created to complement the banking landscape: the Bank of Bombay (1840) and the Bank of Madras (1843) The government contributed Rs. 3 lakhs as part of the capital for each of these banks.
Governance and Operations of the Presidency Banks: The governance of the Presidency Banks, including the Bank of Bengal, Bank of Bombay and Bank of Madras, was governed by Royal Charters, subject to periodic revisions. These banks were managed by a board of directors, with a majority representing large European managing agencies in India, acting as proprietary directors.
Initially, the Presidency Banks focused on discounting bills of exchange and other negotiable instruments, maintaining cash accounts and soliciting deposits. Loans were offered, but they were capped at Rs. one lakh, with a lending period restricted to three months. Notably, these banks were granted the privilege of issuing currency notes within their respective regions, marking the introduction of the first legal tender money in the area.
Formation of the Imperial Bank of India (1921): In 1921, the three Presidency Banks amalgamated to create 'The Imperial Bank of India' under the Imperial Bank of India Act, 1920.
3. Explain the evolution of State Bank of India.
Ans: Imperial Bank: (Evolution of State Bank of India): The Imperial Bank of India was formed in 1921 by merging three Presidency Banks (Bank of Bengal, Bank of Bombay and Bank of Madras) It was primarily operating as al commercial bank. It served as the banker to the government, bankers' bank and a national clearing house. However, it lacked the authority to issue currency or engage in foreign business.
Originally, there were plans to transform the Imperial Bank into a full-fledged central bank. But with the establishment of the Reserve Bank of India in 1935, it remained a privileged commercial bank After independence, the demand for nationalizing the Imperial Bank grew. Although the national government agreed in principle to this in February 1948 but no substantial action was taken.
In 1954, the All India Rural Credit Survey Committee recommended the nationalization of the Imperial Bank, proposing its conversion into the State Bank of India (SBI) to expand banking services in rural areas. The Indian government acted on this suggestion and passed the State Bank of India Act, 1955
Consequently, on July 1, 1955 (Red- Letter Day), the Imperial Bank of India, along with ten other banks, was nationalized and rebranded as the State Bank of India.
4. "Imperial Bank plays Dual Role i.e. Commercial and Central Banking" - Explain.
Or
Explain the functions of Imperial Bank.
Ans: The Imperial Bank played a dual role, handling both commercial and central banking functions
A. Commercial Banking Functions:
(a) Accepted various types of deposits and extended advances against securities
(b) Provided safe custody for valuables.
(c) Facilitated fund transfers from one location to another
(d) Invested funds in secure, government-backed securities
(e) Accepted bills of exchange
B. Central Banking Functions:
i) Bankers to the Government:
a) Collected government dues and disbursed payments on behalf of the government.
b) Issued government loans and managed government funds.
c) Oversaw public debt
d) Safeguarded government funds as a custodian
ii. Bankers' Bank:
a) Maintained balances for commercial banks.
b) Provided remittance services for both commercial banks and the public.
c) Operated clearinghouses.
d) Held a unique position in the money market.
In 1935, with the establishment of the Reserve Bank of India (RBI), the Imperial Bank's role underwent a transformation. It ceased to function as the banker to the government. Certain restrictions on its commercial banking functions were lifted. The Imperial Bank was appointed as an agent of the RBI and authorized to conduct government banking activities in places where the RBI did not have its own office. This granted it a special position in the banking ition sector.
5. Why was Imperial Bank of India nationalised/Renamed as SBI?
Ans: Nationalization of Imperial Bank: Birth of State Bank of India
The Imperial Bank, primarily under non-Indian ownership, faced discrimination against Indians in appointments, compensation and loans. In 1955, following recommendations from the All India Rural Credit Survey Committee, the Imperial Bank was nationalized and transformed into the State Bank of India to promote equitable banking access across India
Reasons for Nationalization of Imperial Bank
i. Semi-Government Status: The Imperial Bank operated with several privileges and held a semi-government status, acting as an agent of the Reserve Bank of India where RBI had no branches. This status made it a suitable candidate for nationalization.
ii. Transfer of Profits to Government: The Imperial Bank's significant profits, backed by public trust and government association, led the government to seek the transfer of these profits to the government's accounts
iii. Promotion of Agriculture and Rural Development: To boost agricultural production and rural development, it was essential to extend credit facilities to rural areas, making the nationalization of the Imperial Bank a priority
iv. Monetary Policy Implementation: A strong commercial foundation was required for the effective implementation of government monetary policies and five-year plans, making nationalization crucial.
6. Write a brief note on formation of State Bank of India (SBI) and its Associate Banks.
Ans: The State Bank of India (SBI) is a statutory institution regulated by the State Bank of India Act, 1955.It was established on July 1, 1955. It took over the assets and liabilities of the Imperial Bank of India with the primary aim of expanding banking services in rural and semi-urban areas SBI, along with its subsidiaries, collectively known as the 'State Bank Group, is India's largest commercial bank in terms of branch network, resources and workforce. Its extensive branch network is unparalleled globally, and it stands as the only Indian bank among the world's top hundred banks based on assets.
Associate Banks of State Bank of India
In 1959, the State Bank of India (Subsidiary Bank) Act enabled SBI to take over eight princely state-associated banks as its subsidiaries. These associate or subsidiary banks of State Bank of India included
1. State Bank of Bikaner and Jaipur (Merged in 1964)
i. State Bank of Hyderabad
ii. State Bank of Indore
IV State Bank of Mysore
V. State Bank of Patiala
vi. State Bank of Saurashtra
vii State Bank of Travancore
Presently, State Bank of India no longer has associate or subsidiary banks, as all the mentioned banks were merged into SBI
7. Explain the functions of State Bank of India.
Ans: The functions of the State Bank of India (SBI) can be categorized into Central banking functions and General banking functions.
A. Central Banking Functions
i. Banker to the Government: SBI acts as the government's banker, handling tasks such as collecting charges, granting loans, and providing economic advice.
ii. Bankers' Bank: SBI is considered the "bankers' bank" because it assists other commercial banks by discounting their bills and providing financial support
iii. Currency Chest: In places where the Reserve Bank of India (RBI) doesn't have a branch, SBI maintains currency chests. It ensures the availability of currency under proper RBI supervision.
iv. Acts as a Clearing House: SBI serves as a clearing house in locations without an RBI branch, facilitating inter- bank settlements due to its extensive network.
v. Promotional Functions: SBI promotes various sectors, including agriculture, small-scale industries, weaker sections of society, co-operatives, small traders and unemployed youth etc.
B. General Banking Functions
1. Accepting Deposits: SBI accepts deposits from the public, including current, savings, fixed and other deposit accounts.
ii. Advancing and Lending Money: SBI provides loans and advances, often secured by stocks and securities.
iii. Handling Bills of Exchange: This includes drawing, accepting, discounting, buying, and selling bills of exchange and other negotiable instruments.
iv. Investing Funds: SBI invests funds in specified types of securities.
v. Issuing Letters of Credit: The bank issues and circulates letters of credit.
vi. Fiduciary Services: SBI acts as an administrator, executor and trustee etc.
vii. Selling and Realizing Assets: SBI deals with movable and immovable properties that come into the bank as part of claims.
viii. Trading in Precious Metals: It buys and sells gold and silver
ix. Merchant Banking: SBI offers merchant banking services.
x. Leasing and Project Finance: The bank provides leasing and project finance facilities, among other services.
8. What are Scheduled and Non-Scheduled Banks
Ans: Banks in India are categorized into two groups.
A) Scheduled Banks: These banks are listed in the Second Schedule of the Reserve Bank of India Act, 1934.
To be considered scheduled banks, they must meet two key conditions.
(a) Paid-up capital plus free reserves must be at least Rs. 5.00 lakhs.
(b) The bank's operations must not be detrimental to the interests of depositors.
(C) The Reserve Bank of India can de schedule a bank if these conditions are not met
B) Non-Scheduled Banks: These are commercial banks not included in the Second Schedule of the RBI Act.
1934. They do not enjoy benefits like refinance and rediscounting of bills from the RBI and lack the prestige of scheduled banks. Non-scheduled banks primarily engage in lending, discounting and collecting bills, and various agency services, often requiring higher security for loans.
The RBI currently discourages the establishment of non-scheduled banks.
Difference between Scheduled and Non-Scheduled Banks
9. What are private and public sector banks?
Ans: Commercial banks in India can be categorized into two main types based on their ownership and control.
(a) Private Sector Banks: Private Sector Banks are owned, managed and controlled by private individuals and companies. Despite their private ownership, these banks are fully subject to regulated by the Reserve Bank of India (RBI), ensuring compliance with banking regulations.
Some examples of private sector banks in India are HDFC Bank, AXIS Bank, ICICI Bank, and IDBI Bank.
(b) Public Sector Banks: Public Sector Banks are owned, managed and controlled by the Government of India. All public sector banks in India are categorized as scheduled banks.
A few examples of private sector banks in India are the State Bank of India, Union Bank of India and Central Bank of India etc.
These banks also fall under the regulatory purview of the RBI ensuring proper governance.
differences between Public Sector Banks and Private Sector Banks
differences between Public Sector Banks and Private Sector Banks:
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CHAPTER-8; NATIONALISATION OF BANKS
1. What do you mean by Nationalization of banks? Write a brief note on nationalization process of public sector banks in India? What are its objectives?
Ans: Nationalization of banks is the process of transferring ownership of banks from private individuals to the government.
In India, this began with the nationalization of the Reserve Bank of India on January 1, 1949. Subsequently, 29 major banks were nationalized in four stages: State Bank of India in 1955, eight associate banks of SBI in 1959, 14 major commercial banks in 1969, and six more in 1980. As a result of mergers, there are currently 12 public sector commercial banks in India.
Objectives of Bank Nationalization in India
1. Preventing Concentration of Economic Power: Bank nationalization aimed to prevent a few industrial and business houses from having undue influence over commercial banks. This concentration of power hindered competition and economic growth.
ii. Enhancing Social Control: The existing "social control" measures were ineffective in regulating banks. Nationalization became necessary to ensure better oversight and adherence to regulations..
iii. Directing Finance to Priority Sectors: Nationalized banks were better positioned to channel funds into priority sectors outlined in Five Year Plans, such as agriculture and small industries, in alignment with national interests.
iv. Increasing Deposit Mobilization: Public sector banks expanded into rural areas where private banks had not ventured. This expansion facilitated the mobilization of savings from rural communities.
v. Promoting Balanced Regional Development: Nationalization helped address regional disparities by directing bank finance to backward areas that had been neglected by private banks due to lower profit potential. This contributed to balanced inter-regional development.
2. What are the criticisms against Nationalisation of Banks?
Ans: The following are the criticisms against Nationalization of Banks:
i. Political Purpose over Productive Purpose: Critics argue that there's a risk of the government using nationalized banks' financial resources for political gains rather than for productive economic purposes
ii. State Capitalism, Not Socialism: Some believe that nationalizing around 90% of the banking sector was unnecessary, considering the extensive powers already vested in the Reserve Bank of India. They view it as the start of state capitalism rather than a move toward socialism.
iii. Decline in Functionality: There are concerns that nationalized banks might decline in efficiency and performance, potentially reaching the level of inefficient and corrupt agricultural cooperatives. There's also apprehension that bank officials may become politically influenced over time.
iv. Less Attractive Customer Services: Critics worry that nationalized banks could resemble other public enterprises known for operating at a loss. They may lack the customer-centric focus seen in private banks, potentially leading to poor customer services.
v. Unrealized Promises: Nationalization may not instantly transform commercial banks into agricultural banks. Hopes among the poor and middle-class for easier access to bank loans may not materialize as expected.
3. .What are the Achievements/Performances/Progress of Nationalized Banks/Public Sector Banks in India.
Ans: The nationalization of 14 major commercial banks in July 1969 and six more in 1980 marked a significant moment in the history of India. Following nationalization, these banks underwent substantial changes and made remarkable progress in various areas.
Achievements/Performances/Progress of Nationalized Banks/Public Sector Banks:
i. Branch Expansion: Nationalized banks initiated a deliberate policy of massive branch expansion, moving beyond metropolitan cities to establish a broad network of branches across the country.
ii. Deposit Mobilization: Post-nationalization, there was a significant increase in deposit mobilization. Public sector banks actively promoted banking habits through extensive branch networks and efficient customer service.
iii. Expansion of Bank Credit: Bank credit saw significant growth, supporting the expansion of industrial and agricultural output. Credit from nationalized banks increased by around 20 percent annually.
iv. Advances to Priority Sectors: Nationalized banks were directed to focus on priority sectors, including agriculture, small industries, and more. They played a crucial role in advancing credit to these sectors.
v. Diversification in Banking: Nationalized banks embraced new functions and activities in line with national plans and priorities, diversifying into areas like merchant banking, mutual funds, portfolio management, leasing, and housing finance.
vi. Investment in Government Securities: Nationalized banks were key participants in financing the country's economic plans through investments in government securities.
vii. Change in Deposit Composition: The composition of deposits changed, with a continuous shift toward time deposits, indicating a preference for fixed deposits.
viii. Differential Rate of Interest Scheme: This scheme was introduced in April 1972 which aimed to provide concessional-rate bank credit to economically weaker sections. Public sector banks offered loans at a 4% interest rate to those lacking tangible security but seeking to improve their economic condition with financial support.
The nationalization of banks played an important role in reshaping India's banking sector and promoting financial inclusion and economic growth.
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CHAPTER-9; LEAD BANK SCHEME
1. What is meant by Lead Bank Scheme? Discuss its objectives.
Ans: The Lead Bank Scheme was initiated by the Reserve Bank of India in December 1969. It designates a specific bank as a leader for each district. Its purpose is to formalize the "area approach" for nationwide banking and credit development. Under this scheme, all districts are allocated to various banks, and the designated "lead bank" takes on the role of fostering economic growth by expanding branch networks and offering diverse credit services in its assigned district. The lead bank is responsible for assessing the district's resources and potential for banking development.
Objectives of Lead Bank:
(a) Identifying Suitable Branch Locations: Lead Bans determine the best areas to open new bank branches in the district.
(b) Maximizing Credit for Development: These banks provide the most significant credit support for the district's development.
(c) Mobilizing Deposits and Investment: These banks encourage local people to deposit money and invest through various financial programs.
(d) Coordinating Financial Institutions: Such banks coordinate the activities of cooperative banks, commercial banks, and other financial institutions in the district.
(e) Overcoming Development Hurdles: These banks can Identify and address major obstacles to the district's development.
What are the functions of Lead Bank?
Ans: The following are the functions of Lead Bank:
(a) Resource Assessment: Lead Banks evaluate the district's potential for banking development by finding areas without banking services.
(b) Outreach to Businesses: Lead Banks identify and assist industrial, commercial and other entities without bank accounts.
(c) Branch Expansion: These banks gradually establish new bank branches in the district.
(d) Problem Identification: These banks can identify and study local issues and challenges.
(e) Credit Planning: These banks develop a comprehensive credit plan, addressing the lack of marketing facilities for agriculture and industry.
(f) Agricultural Support: These banks assess agricultural input storage and local service needs.
(g) Government Liaison: It maintains communication and collaboration with government and semi-government agencies.
(h) Staff Training: These banks train banking personnel to advise small borrowers and farmers in priority sectors and monitor bank credit.
(i) Integration with District Plans: These banks can align bank schemes with district plans for effective credit distribution and expanded banking services to meet local needs.
2. What are the important aspects of the progress, working and effects of the Lead Bank Scheme (LBS)?
Ans: The Lead Bank Scheme (LBS) was introduced by the RBI in 1969 to promote economic development in India. In the early years, there was confusion about its purpose. By 1973-74, surveys were done in 380 districts, primarily in underdeveloped states. The scheme established district-level committees with banks, financial institutions, and government officials to identify important projects and share information about lending to priority sectors.
In 1976, a High Power Committee (HPC) was set up to oversee LBS and issue guidelines. Banks had to create district credit plans every three years. In 1989, the Service Area Approach was adopted to improve rural lending.
The LBS brought together financial institutions and development agencies to support rural economic development. It emphasized the importance of district credit plans and cooperation among various agencies.
Under the scheme, committees like District Consultative Committee (DCC), District Level Review Committee (DLRC), Block Level Bankers Committee (DLBC), State Level Bankers Committee (SLBC), State Level Review Committee (SLRC), and Standing Committee (SC) were formed to implement credit plans.
The LBS contributes to economic growth, employment, and the welfare of marginalized groups. It aims to reduce regional and sectoral disparities in the country.
However, the progress in implementing LBS varies among states, and there are challenges affecting its full implementation.
3. Discuss the weaknesses / limitations of Lead Bank Scheme.
Ans: The following are the weaknesses/limitations of Lead Bank Scheme:
(a) Lack of Uniform Methodology: There is no consistent method used to create the district credit plans.
(b) Misalignment with Government Development Plans: Credit plans are not always in line with the government's development goals and priorities.
(c) Ineffective Allotment of Districts: Some banks are assigned districts where they don't have a strong presence, making it challenging to provide proper supervision and guidance.
(d) Ineffectiveness in Underdeveloped Districts: The Lead Bank Scheme doesn't work well in districts that lack basic infrastructure and other essential resources.
(e) Limited Implementation: The scheme may not be fully implemented in all regions, leading to unequal development across the country.
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CHAPTER 10; BANKING SYSTEM
1. Very Short answer Questions: (Textual) 1 mark each
i. In which year was the Imperial Bank established?
Ans: The Imperial Bank was established in the year 1921.
ii. In which year were 14 Indian Commercial Banks nationalized?
Ans: In the year 1969, 14 Indian Commercial Banks were nationalized.
iii. In which year were 6 Indian Commercial banks nationalized?
Ans: In the year 1980, 6 Indian Commercial banks were nationalized.
iv. How many commercial banks were nationalized in 1980?
Ans: In 1980, a total of 6 commercial banks were nationalized
v. In which year was the Lead Bank Scheme introduced?
Ans: The Lead Bank Scheme was introduced in the year 1969.
vi. In which year was the State Bank of India established?
Ans: The State Bank of India was established in 1955.
vii. Name the three Presidency Banks.
Ans: The three Presidency Banks were the Bank of Bengal, the Bank of Bombay and the Bank of Madras.
viii. What was the previous name of the State Bank of India?
Ans: The previous name of the State Bank of India was the Imperial Bank of India.
ix. In which year was the Imperial Bank of India nationalized and renamed as State Bank of India?
Ans: The Imperial Bank of India was nationalized and renamed as the State Bank of India in the year 1955.
2. What are the different types/forms of banking system?
Ans: The different types of banking systems are:
(a) Branch Banking System: This system involves a single bank operating through a network of branches, all under the same ownership and management. Each branch provides a range of banking services.
(b) Unit Banking System: Unit banking is characterized by independent, single-branch banks that operate without a network of branches These banks are stand-alone entities
(c) Group Banking System: Group banking brings multiple independently incorporated banks under the control of a holding company or through other mechanisms. The member banks have their own separate legal status.
(d) Chain Banking System: Chain banking involves different banks, typically with multiple branches, coming under common control through common shareholders or interlocking directors. Each bank maintains its separate legal entity.
(e) Correspondent Banking System: Correspondent banking links banks of different sizes and stature, often facilitating international financial transactions. In this system, one bank acts as an intermediary to connect two other banks, often assisting with fund transfers and other services.
3. Write short notes on: Branch Banking, Unit Banking, Group Banking, Chain Banking, Correspondent Banking
Ans: Branch Banking: Branch Banking System is a type of banking model in which a single financial institution, under unified ownership and management, conducts its banking operations through a widespread network of branches. Each branch is overseen by a branch manager and staffed with officers, clerks and support personnel. This system allows the bank to provide financial services to customers in various locations, both within the country and internationally For example, the State Bank of India, a prominent public sector bank, maintains an extensive network of over 16,000 branches in India, making it one of the largest branch banking systems in the world.
Unit Banking: Unit Banking is a banking system in which an independent bank conducts its financial operations exclusively from a single office without any branch network. This system is often referred to as "localized banking" because the bank's activities are confined to a specific area. Unit banks typically have their own board of directors and shareholders. This system originally emerged and developed in the United States and is characterized by the absence of branch offices and a more limited operational scope compared to branch banking. Unit banks tend to be smaller in size compared to banks operating under a branch banking system.
Group Banking: Group Banking is a financial system in which a holding company exercises control over subsidiary companies engaged in banking and related activities. In some instances, both the holding company and its subsidiaries may be involved in banking services. For example, in India, the State Bank of India (SBI) is a prime example of a group banking system, with subsidiary banks like State Bank of Mysore, State Bank of Indore, State Bank of Hyderabad, State Bank of Bikaner and Jaipur, State Bank of Patiala, and State Bank of Travancore, which offer a range of banking and non-banking services such as leasing and merchant banking.
Chain Banking: Chain Banking is a banking system in which multiple independent banks are united under a common control mechanism. This can be achieved through shared ownership by common shareholders or by interlocking directors. In this system, each bank maintains its distinct legal entity and carries out its operations without direct intervention from a central organization. For instance, Karur Vysya Bank and Lakshmi Vilas Bank in India share common directors, enabling them to have common management policies despite their separate legal entities and head offices located in the same place.
Correspondent Banking: Correspondent Banking is a system where banks of varying sizes and stature are interconnected to facilitate financial transactions. In this system, smaller banks, often referred to as unit banks, deposit their cash reserves with larger correspondent banks, which are, in turn, connected to even larger banks typically located in major financial centers. Many Indian banks serve as correspondent banks for various foreign banks, helping to facilitate international financial transactions and relationships.
4. What are the advantages and disadvantages of Branch Banking System?
Ans: The following are the advantages of Branch Banking System:
i Benefits of Large-Scale Operations: Branch banks have substantial resources, enabling them to hire experts and use modern technology for efficient operations.
ii. Wider Risk Distribution: Branch banks operate across diverse regions with varying economic conditions, allowing losses in one area to be offset by profits in another, thus spreading risk geographically.
iii. Efficient Management: The system fosters efficient management as staff gain experience by working in various branches, gaining a better understanding of different localities.
iv. Economy in Remittance: Branch banking offers cost-effective fund transfer options, as they can utilize entries in their books rather than physically moving cash from one place to another
V. Economy of Cash Reserves: Cash can be easily transferred between branches, reducing the need for large idle cash reserves.
vi. Diversification of Deposits and Assets: With a broader geographical reach, branch banks can diversify their deposits and assets, allowing them to mobilize funds where savings are abundant and extend loans where funds are scarce.
Disadvantages of Branch Banking System:
i. Difficulty in Management and Control: Managing and controlling numerous branches in different locations can be challenging
ii. Less Initiative: Branch managers have limited decision making authority and often need to seek approval from the head office, reducing their ability to take initiatives.
iii. Adjustment of Losses: Branches with losses may affect the overall profitability as they are compensated by profits from other branches, impacting the efficiency of the organization.
iv. Concentration of Economic Power: Large branch banks may accumulate economic power in the hands of a few individuals, potentially leading to monopolistic tendencies.
V. Continuance of Inefficient Branches: Inefficient branches may persist in the system as their losses can be offset by profits from other branches, which can protect inefficiency.
vi. Unhealthy Competition: Branches of different banks may cluster in lucrative areas, leading to unhealthy competition among branches in the same locality.
5. What are the advantages and disadvantages of Unit Banking System?
Ans: Advantages of Unit Banking System:
i. Easy Establishment: Unit banks require less capital and involve simpler formalities and regulations compared to branch banking.
ii. Easy Management and Control: The smaller size and operations of unit banks make management, supervision and control more straightforward.
iii. Quick Decisions: Unit banks allow for faster decision-making by local managers, reducing the need for approval from a distant head office.
iv. Satisfaction of Local Needs: Unit banking is localized, enabling banks to specialize in addressing local issues and requirements, thus better serving the community's needs.
V. Personalized Services: Unit banking fosters close relationships between bankers and customers, offering personalized services that may be lacking in branch banking, where staff is frequently transferred.
vi. No Chance for Monopoly: Unit banks remain independent and localized, reducing the potential for monopolistic tendencies in the banking sector.
Disadvantages of Unit Banking System:
i. No Ability to Face Crisis: Limited operations and a lack of investment diversification make unit banks less capable of withstanding losses, leaving them vulnerable to financial crises.
ii. No Geographical Distribution of Risk: Unit banks' localized operations mean they cannot distribute risk across broader regions. Economic downturns in their area can lead to substantial losses
iii. Variation of Interest Rate: Unit banks may not offer uniform interest rates, leading to differences in rates between banks. The availability of funds significantly influences interest rates.
iv. Inadequate Banking Facilities: Due to their limited operations and financial resources, unit banks cannot provide the full range of banking services available in branch banking.
V. Inconvenience in Remittance of Funds: Unit banks lack branches in other areas, making fund transfers between locations costly and inconvenient.
vi. Neglect of Weaker Sections: In areas where unit banks operate, limited resources may result in neglect of the weaker sections of society, such as the poor.
6. What are the advantages and disadvantages of Group Banking System?
Ans: Advantages of Group Banking System:
i. Enhancement of Operational Efficiency: Group banking system enhances the operational efficiency of participating banks by facilitating the sharing of knowledge and experience.
ii. Broader Market: Small banks in a group banking system gain access to a wider market for their excess resources, leading to improved earnings and network expansion.
iii. Mobility and Transfer of Resources: During crises, funds can be transferred among participating banks, enabling them to collectively and effectively address financial challenges.
iv. Large Scale Operation: Group banking enables member banks to engage in large-scale operations, benefiting from economies of scale.
Disadvantages of Group Banking System:
i.Lack of Effective Managerial Control: Managerial control in group banking is less effective, as it is indirect and more flexible. This system may not provide specialized management.
ii. Inefficiency of Member Banks: Inefficiency in one participating bank can negatively impact other participating banks within the group.
iii. Limited Facilities: Group banking may not offer the full range of facilities provided by branch banking.
iv. Limited Fund Mobilization: Group banking lacks the capacity to mobilize funds on the same scale as branch banking, limiting its ability to provide the same level of operational economy.
7. Write the difference between Branch Banking and Unit Banking.
Ans: Difference between Branch Banking and Unit Banking
Branch Banking and Unit Banking:
8. Write the Differences between Group Banking and Chain Banking
Answer:-
Group Banking and Chain Banking:
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Access All Unit's Answers: Assam Board Class 11 Finance Notes (Updated)