NEP FYUGP - (FINANCE MAJOR)
BANKING SELF STUDY NOTES FOR EXAM
Banking – Unit I Origin, Development, Types, and Functions of Banks
2 Marks Questions (Definitions / Direct Answers)
1). Define a bank. [GU BCom 2021]
Answer: A bank is a financial institution that accepts deposits from the public and provides loans, credit, and other financial services.
The Banking Companies Act of 1949 defines banking company as “accepting for the purpose of lending or investment of deposit money from the public, repayable on demand or otherwise and withdrawable by cheque, drafts, and order or otherwise”.
2). What is meant by a commercial bank? [GU BCom 2022]
Answer: A commercial bank is a type of bank that accepts deposits and provides loans mainly for trade, business, and general purposes to earn profit.
3). Define the central bank. [GU BCom 2023]
Answer: A central bank is the main financial authority of a country that issues currency, regulates credit, and controls other banks (for example, the Reserve Bank of India).
4). What is meant by indigenous bankers?
Answer: Indigenous bankers are private moneylenders or local bankers who accept deposits and give loans in traditional ways without modern banking facilities.
5). Define merchant banking.
Answer: Merchant banking refers to financial services provided to companies such as issue management, underwriting, corporate loans, and business consultancy.
6). What do you mean by scheduled banks? [GU BCom 2022]
Answer: Scheduled banks are those banks which are included in the Second Schedule of the RBI Act, 1934 and follow all RBI rules and regulations.
7). State the meaning of non-scheduled bank.
Answer: Non-scheduled banks are banks that are not listed in the Second Schedule of the RBI Act, 1934 and are not required to follow all RBI rules.
8). What is meant by universal banking? [GU BCom 2024]
Answer: Universal banking means providing all types of financial services such as commercial banking, investment banking, insurance, and mutual funds under one roof.
9). Define cooperative bank.
Answer: A cooperative bank is a financial institution owned and managed by members on a cooperative basis, mainly to provide banking services to farmers, workers, and low-income groups.
10). Write two primary functions of commercial banks. [GU BCom 2021]
Answer: The following are the two primary functions of commercial banks:
Accepting deposits from the public.
Providing loans and advances.
11). Write two agency functions of banks. [GU BCom 2023]
Answer: The following are two agency functions of banks:
Collection of cheques, drafts, and bills for customers.
Payment of insurance premiums, utility bills, or taxes on behalf of customers.
12). Mention two development functions of a central bank.
Answer: The following are two development functions of a central bank:
Promoting financial institutions to support economic growth.
Providing credit to priority sectors such as agriculture and industry.
13). What is the difference between retail banking and wholesale banking?
Answer: The following table shows the main differences between retail banking and wholesale banking:
14). Define e-banking. [GU BCom 2024]
Answer: E-banking means using electronic systems such as internet banking, mobile banking, and ATMs to provide banking services.
15). What is mixed banking?
Answer: Mixed banking is a system in which banks perform both commercial banking (deposits and short-term loans) and investment banking (long-term finance to industries).
5 Marks Questions (Short Notes / Brief Explanations)
1). Write a note on the origin and growth of banking in India. [GU BCom 2021]
Answer: Banking in India started in the ancient period when people used moneylenders and traders for loans and deposits. The modern banking system began with the establishment of the Bank of Hindustan in 1770. Later, the Presidency Banks like Bank of Bengal, Bank of Bombay, and Bank of Madras were set up. In 1921, these banks were merged into the Imperial Bank of India, which later became the State Bank of India in 1955. After independence, the Reserve Bank of India controlled and regulated the banking sector. Nationalization of banks in 1969 and 1980 gave a big push to banking growth in rural and urban areas. Today, Indian banking has expanded with public, private, foreign, and digital banks.
2). Explain the functions of commercial banks. [GU BCom 2022, 2023]
Answer: The main functions of commercial banks are:
Accepting deposits – Banks take money from the public in the form of savings, current, and fixed deposits.
Providing loans and advances – Banks give money to individuals and businesses in the form of loans, cash credit, overdraft, etc.
Credit creation – By lending more than the cash they keep, banks create credit in the economy.
Agency functions – Banks provide services like paying bills, transferring money, and collecting cheques.
General utility functions – Banks provide lockers, foreign exchange, ATM, internet banking, etc.
3). Distinguish between scheduled and non-scheduled banks. [GU BCom 2022]
Answer:
4). Write short notes on: [GU BCom 2024]
a) Retail Banking: Retail banking is the type of banking that deals directly with individual customers rather than companies or industries. It focuses on providing day-to-day financial services to the public. Services include savings accounts, current accounts, fixed deposits, personal loans, home loans, education loans, credit/debit cards, and ATM services. The main features of retail banking are large numbers of small customers, standardized products, and easy access through bank branches, ATMs, and online banking. Retail banking is important because it mobilizes small savings of people and provides them with financial support for personal needs.
b) Wholesale Banking: Wholesale banking is the opposite of retail banking. It provides services to large clients such as big companies, industries, government bodies, and institutions. Instead of thousands of small customers, wholesale banking focuses on a few big clients with large transactions. Services include corporate loans, project finance, infrastructure finance, working capital finance, foreign exchange, and trade financing. Wholesale banking is important because it helps in the growth of industries and big businesses by providing large-scale financial support. However, it also involves higher risk as the amount of money lent is very large.
c) Universal Banking: Universal banking refers to a system where a bank provides all types of financial services under one roof. It combines the features of both retail and wholesale banking along with other financial activities like insurance, investment banking, asset management, and mutual funds. The main advantage is that customers get multiple services in a single place, which saves time and builds trust. For banks, it helps in diversifying their services and earning more profit. In India, banks like ICICI Bank, Axis Bank, and HDFC Bank follow the universal banking model. Universal banking is important in the modern era as people want a “one-stop solution” for all their financial needs.
d) Cooperative Banks: Cooperative banks are financial institutions that work on a cooperative basis. They are owned and managed by members, and their main aim is to provide credit to farmers, small traders, and weaker sections at low interest rates. These banks mobilize small savings from people and give loans for agriculture, rural development, and small industries. They work at different levels such as State Cooperative Banks, District Central Cooperative Banks, and Primary Agricultural Credit Societies.
e) Merchant Banks: Merchant banks are banks that provide financial services mainly to business firms and corporate clients. They do not deal with the general public like commercial banks. Their main functions include issue of shares and debentures, underwriting, project finance, mergers, acquisitions, and corporate advisory services. Merchant banks help companies to raise money from the capital market and play an important role in industrial development.
f) ATM (Automatic Teller Machine)
Answer: ATM is a newly introduced electronic device to serve bank customers. ATM stands for Automatic Teller Machine that disburses cash once the ATM card is inserted and a PIN (Personal Identification Number) is keyed in the machine. The ATM not only disburses cash but also provides details of balance, accepts deposits of cash and cheques, and allows mail services. All ATMs are open 24 hours a day. The ATM facility is commonly known as “all time money” or “any time money” facility.
The ATM card is non-transferable and may be cancelled by the issuing bank without assigning any reason. The ATM service is meant for withdrawing cash against the available balance in the cardholder’s account. A cardholder may withdraw a minimum and maximum amount per day as decided by the bank.
Procedure for Using ATM
For using an ATM, the proper procedure must be followed:
(a) Insert the ATM card into the machine as directed and wait until the machine prompts to enter the PIN.
(b) Wait for a few seconds while the machine processes the PIN.
(c) Enter the amount of cash required.
(d) Wait for a few seconds until the cash is dispensed.
(e) Count the cash and always remember to collect the card before leaving.
An unauthorized person may access ATM services on a cardholder’s account if he gains possession of the card and PIN. For access to the card and PIN, bankers bear responsibility. In case of payment to an unauthorized person due to the customer’s fault, the loss will have to be borne by the account holder. If the card is lost, it should be immediately reported to the bank, and a fresh card may be issued after scrutiny. The card remains valid for two years.
g) Debit Card: A debit card, also called a bank card, plastic card, or check card, is a payment card used to make purchases directly from the cardholder’s bank account. Unlike a credit card, the money must be available in the account at the time of purchase, and the amount is immediately transferred to the merchant. Debit cards are issued against current or savings accounts and allow withdrawals from ATMs. Some cards are prepaid or virtual for online use. Debit cards have daily withdrawal limits and may also offer cashback facilities at merchants. They have become widely used, in some countries even replacing cheques and cash transactions.
h) Credit Card: A credit card, also known as plastic money, allows the cardholder to buy goods and services without immediate payment, giving the option to pay later, usually within 30 to 45 days. Introduced in India in the early 1980s, credit cards reduce the need for cash and are convenient for daily transactions. Banks pay the seller immediately and bear the risk of default, earning commission and fees. Credit cards are widely used by business executives, professionals, and middle-income groups and can be used for shopping, travel, hospital bills, and other services. Modern cards include ATM cards, prepaid cards, smart cards, and electronic payment options.
i) Phone Banking: Phone Banking is a modern banking service that allows customers to access banking facilities over the telephone. It provides an easy and convenient way for account holders to perform a variety of banking transactions without visiting a bank branch. Using phone banking, customers can check their account balances, transfer funds between their own accounts or to others’ accounts, pay utility bills, request cheque books, and track transaction history.
Security is a crucial aspect of phone banking. Customers are required to authenticate themselves using a password, PIN, or other verification methods to ensure that unauthorized persons cannot access the account. Phone banking services are available 24 hours a day, 7 days a week, providing customers with uninterrupted access to banking facilities. It is particularly helpful for people who are unable to visit bank branches due to distance, mobility issues, or time constraints.
j) Internet Banking: Internet Banking, also known as online banking, enables customers to access a wide range of banking services through the bank’s official website or mobile application. It has become an essential part of modern banking due to its speed, convenience, and accessibility. Customers can perform various financial transactions such as checking account balances, downloading account statements, transferring funds to other accounts, paying bills, investing in securities, applying for loans, and managing fixed deposits.
Internet banking allows customers to perform banking activities anytime and anywhere, eliminating the need to visit a branch physically. To ensure security, banks use measures like user IDs, passwords, OTPs (one-time passwords), and encryption techniques to protect customers’ sensitive information. Internet banking also supports e-commerce transactions, allowing users to make payments online safely and efficiently. With the integration of mobile apps and online services, internet banking has become a key tool for financial management, enabling real-time access to accounts and facilitating smooth transactions for individuals and businesses alike.
5). Explain the role of indigenous bankers in the Indian economy.
Answer: Indigenous bankers are traditional moneylenders or private bankers who have been working in India for centuries, even before modern banks were established. They include Shroffs, Seths, Mahajans, and Chettis. Their role in the Indian economy is:
They provide loans and credit to traders, farmers, and small businesses, especially in rural and semi-urban areas.
They help in financing trade and commerce, particularly in local markets.
They serve people who do not have access to modern banks.
They play a major role in mobilizing savings of people and investing them in trade and agriculture.
Even today, in some villages, they act as an alternative to banks because of quick lending and easy availability of money.
Thus, indigenous bankers have been important in supporting agriculture, trade, and small businesses in India’s economy.
6). State the different types of banks in India. [GU BCom 2023]
Answer: The banking system in India consists of different types of banks to serve different needs. The main types are:
Commercial Banks: These banks provide banking services to individuals, businesses, and government organizations. They accept deposits, grant loans, and offer facilities such as overdrafts and fund transfers. Examples are SBI, HDFC, ICICI.
Co-operative Banks: Co-operative banks work on a cooperative basis and mainly provide loans to farmers, small borrowers, and low-income groups. They are important for agricultural and rural development.
Development Banks: These banks provide long-term finance for industries, agriculture, and infrastructure projects. Examples include NABARD, SIDBI, EXIM Bank.
Central Bank: The Reserve Bank of India (RBI) is the central bank of the country. It regulates and controls the entire banking system, issues currency, and formulates monetary policy.
Regional Rural Banks (RRBs): RRBs were established to provide credit and banking services in rural areas, especially to farmers, agricultural workers, and small entrepreneurs.
Foreign Banks: These are banks with head offices abroad but branches in India. They provide international banking and foreign exchange services. Examples include HSBC, Citibank.
Small Finance Banks & Payment Banks: These banks aim to promote financial inclusion. They provide simple services such as savings accounts, deposits, and small loans to rural households and low-income groups.
7). Distinguish between a central bank and commercial bank.
Answer:
8). Explain the agency functions of commercial banks. [GU BCom 2021]
Answer: Banks perform certain functions on behalf of their customers. While performing these services, banks act as agents to their customers, hence these are called as agency services. Important agency functions are:
a) Collection: Commercial banks collect cheques, drafts, bills, promissory notes, dividends, subscriptions, rents and any other receipts which are to be received by the customer. For these services banks charge a nominal amount.
b) Payment: Banks also makes payments on behalf of their customers like paying insurance premium, rent, taxes, electricity and telephone bills etc for such services commission is charged.
c) Income – Tax Consultant: Commercial banks act as income-tax consultants. They prepare and finalise the income tax returns of their clients.
d) Sale And Purchase Of Financial Assets: As per the customers instruction banks undertake sale and purchase of securities, shares and any other financial assets. Nominal charges are charged by a bank.
e) Trustee, Executor And Attorney: As a trustee, banks become the custodian and manager of customer funds. Bank also acts as executor of deceased customer’s will. As an Attorney the banks sign the documents on behalf of the customer.
f) E- Banking: Through Electronic Banking, a customer can operate his bank account through the internet. He can make payments of various bills. He can even transfer money from one place to another.
Thus, agency functions make banks more useful to customers beyond just loans and deposits.
9). What are the promotional functions of the Reserve Bank of India?
Answer: RBI not only regulates banks but also performs several promotional functions to support economic development:
Promotion of Agricultural Credit: The Reserve Bank of India plays a vital role in promoting agricultural credit by supporting institutions like NABARD, cooperative banks, and regional rural banks. It ensures that farmers receive easy and cheap loans to improve agricultural productivity and rural development.
Support to Industrial Development: The RBI also contributes to industrial growth by assisting development banks such as SIDBI, IFCI, and ICICI, which provide long-term finance to industries. It offers refinance facilities for industrial projects to encourage investment in the industrial sector.
Encouragement of Small-Scale Industries (SSI): To promote small-scale industries, the RBI frames suitable credit policies and guidelines. It also directs commercial banks to allocate a specific portion of their lending to priority sectors, including SSIs, to ensure their growth and survival.
Expansion of Banking in Rural Areas: The RBI has been instrumental in expanding banking facilities in rural and remote areas. It promotes the establishment of Regional Rural Banks (RRBs) and encourages commercial banks to open branches in villages to provide credit and banking services to rural populations.
Promotion of Financial Literacy and Banking Habits: Another important promotional function of the RBI is spreading financial literacy. It creates awareness about savings, deposits, and digital payment systems, thereby encouraging people to use formal banking channels and reduce dependence on informal sources of finance.
Support to Cooperative Banks: The RBI also strengthens cooperative banks, which play a key role in rural credit and development. By regulating and supporting these institutions, the RBI ensures that cooperative banks function efficiently and contribute to rural economic progress.
Promotion of Financial Inclusion: The RBI actively promotes financial inclusion to bring every section of society under the ambit of banking services. It has encouraged the establishment of payment banks and small finance banks to reach unbanked areas and ensure equitable access to financial facilities.
Thus, RBI plays a key promotional role in balanced and inclusive economic growth in India.
10 Marks Questions (Long / Essay Type)
1. Explain in detail the primary and secondary functions of commercial banks. [GU BCom 2022, 2024]
Answer: Modern commercial banks perform a variety of functions. They keep the wheels of commerce, trade and industry always revolving.
The Following are the primary and secondary functions of commercial banks:-
I. Primary or Banking functions
II. Secondary or Non-Banking functions.
I. Primary Functions: Commercial banks have two important banking functions. One is accepting deposits and other is advancing loans.
1) Deposits: One of the main functions of a bank is to accept deposits from the public. Deposits are accepted by the banks in various forms.
a)Current Account Deposits: Current Accounts are usually opened by businessmen who have a number of regular transactions with the bank, both deposits and withdrawals. No interest is paid on current deposits. Banks may even charge interest for providing this facility.
b)Saving Account Deposits: Saving Accounts are opened by salaried and other less income people. There is no restriction on number and amount of deposits. Withdrawals are subject to certain restrictions. It earns Interest but less than fixed deposits.
c)Fixed Account Deposits: Deposits in fixed account are time deposits. Money under this account is deposited for a certain fixed period of time varying from 15 days to several years. A high rate of interest is paid on such deposits.
d)Recurring Account Deposits: In Recurring deposit, a specified amount is regularly deposited by account holder, at an internal of usually a month. This is to form the habit of small savings among the people. At the end of maturity period, the account holder gets a substantial amount. Interest on this type of deposit is almost equal to fixed deposits.
2) Loans and Advances: Banks not only mobilize money but also lend to its credit worthy customers for maximizing profits. Loans and Advances are granted to:
a) Business and Trade: Commercial banks grant short-term loans to business and trade activities in following forms: i) Overdraft ii) Cash Credit iii) Discounting of Bills iv) Money At Call v) Direct Loans
b) Loans to Agriculture: Banks grant short-term credit to agriculture at a lower rate of interest. Loans are granted for irrigation, purchase of equipments, inputs, cattle etc.
c) Loans To Industries: Banks grant secured loans to small and medium scale industries to meet their working capital needs. The time period may be from one to five years. It may be in the form of Overdraft, cash credit or direct loan.
d) Loans To Foreign Trade: Loans are granted to export and import in the form of direct loans, discounting of bills, guarantee for deferred payments etc. Here the rate of interest is low.
e) Consumer Credit / Personal loans: grant credit to households in a limited amount to buy some durable consumer goods like television sets, refrigerators, washing machines etc. Such consumer credit is repayable in installments. Under the 20-point programme, the scope of consumer credit has been extended to cover expenses on marriage, funeral etc., as well.
f) Miscellaneous Advances: Banks also gives advances like packing credits to exporters, export bill purchased or discounted, import finance, finance to self-employed, credit to weaker sections of society at concessional rates etc.
II. Secondary Functions: Banks give various forms of services to the public. Such services are termed as non- banking or secondary functions:
1. Agency Services: Banks perform certain functions on behalf of their customers. While performing these services, banks act as agents to their customers, hence these are called as agency services. Important agency functions are:
a) Collection: Commercial banks collect cheques, drafts, bills, promissory notes, dividends, subscriptions, rents and any other receipts which are to be received by the customer. For these services banks charge a nominal amount.
b) Payment: Banks also makes payments on behalf of their customers like paying insurance premium, rent, taxes, electricity and telephone bills etc for such services commission is charged.
c) Income – Tax Consultant: Commercial banks act as income-tax consultants. They prepare and finalise the income tax returns of their clients.
d) Sale And Purchase Of Financial Assets: As per the customers instruction banks undertake sale and purchase of securities, shares and any other financial assets. Nominal charges are charged by a bank.
e) Trustee, Executor And Attorney: As a trustee, banks become the custodian and manager of customer funds. Bank also acts as executor of deceased customer’s will. As an Attorney the banks sign the documents on behalf of customer.
f) E- Banking: Through Electronic Banking, a customer can operate his bank account through internet. He can make payments of various bills. He can even transfer money from one place to another.
2. Utility Services: Modern Commercial banks also performs certain general utility services for the community, such as:
a) Letter Of Credit: Banks also deal in foreign trade. They issue letter of credit and provide guarantee to foreign traders for the soundness of their customers.
b) Transfer Of Funds: Banks arrange transfer of funds cheaply and safely from one place to another. Transfer can be in the form of Demand draft, Mail transfer Travelers cheques etc.
c) Guarantor: Banks offer a guarantee of payment on behalf of importer to facilitate imports with deferred payments.
d) Underwriting: This facility is provided to Joint Stock Companies and to government to enable them to raise funds. Banks guarantee the purchase of certain proportion of shares, if not sold in the market.
e) Locker Facility: Safe Lockers are provided to the customers. So that they can deposit their valuables like Jewellery, Securities, Shares and other documents.
f) Referee: Banks may act as referee with respect to financial standing, business reputation and respectability of customers.
g) Credit Cards: Credit card facility has been introduced by commercial banks. It enables the holder to minimize the use of hard cash. Credit card is a convenient medium of exchange which enables its holder to buy goods and services from member – establishment without using money.
2). Discuss the origin and development of banking in India. [GU BCom 2021, 2023]
Answer: The word Bank has different views regarding its origin. Some economists say it comes from the German word Banc meaning joint stock firm, while others believe it is from the Italian word Banco meaning a heap or mound. Another view is that it is from the Greek word Banque meaning a bench, as in olden days Jews carried money transactions while sitting on benches. If a banker failed, his bench was broken which gave rise to the word Bankrupt. The most accepted view is that it came from Banc/Banco as it was used during the establishment of the Bank of Venice in 1157, which is considered the oldest bank. However, it was only an office for transferring public debt, not a modern bank.
The first bank in history was the Bank of Venice (1157). Later, the Lombardy bankers were famous in England. Modern banking began with the English Goldsmiths after 1640. In India, the first bank was the Bank of Hindustan (1770), which failed in 1782. The first modern bank was the Bank of Bengal (1806).
According to Crowther, modern banking has three ancestors:
The Merchant – Merchants issued hundis to transfer money. In India, they were known as Seths.
The Goldsmith – People deposited their gold and silver with goldsmiths. They issued receipts, which worked like cheques. Later, they also started lending money.
The Moneylender – Goldsmiths noticed deposits were more than withdrawals. So they lent out extra money on interest while keeping some reserve. This became the base of modern banking.
Thus, banking gradually developed from merchants and goldsmiths to the organized system we see today.
Q. Discuss the different types of banks operating in India with examples. [GU BCom 2023]
Answer: The Indian banking system is vast and diversified, consisting of different types of banks to meet the varied needs of individuals, businesses, agriculture, trade, and the government. The major types of banks operating in India are discussed below:
1. Commercial Banks: Commercial banks are the most important type of banks in India. They provide banking services such as accepting deposits, granting loans, overdraft facilities, and fund transfers. They cater to individuals, businesses, and industries. Examples include State Bank of India (SBI), HDFC Bank, ICICI Bank, and Punjab National Bank.
2. Co-operative Banks: These banks are organized on the principle of cooperation and mutual help. They mainly provide credit facilities to farmers, small traders, and weaker sections of society at comparatively low interest rates. Co-operative banks have been a strong support for rural credit in India.
3. Development Banks: Development banks provide medium and long-term finance for industries, agriculture, and infrastructure projects. They focus on promoting economic development rather than short-term profits. Examples include NABARD (for agriculture and rural development), SIDBI (for small industries), and EXIM Bank (for export-import trade).
4. Central Bank: The Reserve Bank of India (RBI) is the central bank of the country. It regulates and controls the entire banking system, formulates monetary policy, issues currency, supervises commercial banks, and maintains financial stability. It also acts as the lender of last resort.
5. Regional Rural Banks (RRBs): RRBs were set up to meet the banking and credit needs of rural areas. They provide financial support to farmers, agricultural laborers, artisans, and small entrepreneurs. RRBs combine the local touch of cooperative banks with the professionalism of commercial banks.
6. Foreign Banks: These are banks incorporated abroad but operating through branches in India. They provide international banking services, foreign exchange facilities, and promote global trade. Examples include HSBC, Citibank, and Standard Chartered Bank.
7. Small Finance Banks and Payment Banks: These are newly introduced categories of banks aimed at promoting financial inclusion. Small finance banks provide basic banking services like savings accounts and small loans to rural households, small businesses, and low-income groups. Payment banks, on the other hand, can accept deposits and provide remittance services but cannot lend. Examples include Airtel Payments Bank, Paytm Payments Bank, and AU Small Finance Bank.
Conclusion: Thus, the banking system in India is made up of different types of banks, each serving specific purposes. From commercial banks that serve individuals and businesses to cooperative and rural banks that focus on agriculture, and from development banks that finance industries to modern payment banks, all contribute to the balanced growth of the Indian economy.
4. What are the functions of a central bank? Explain with reference to the Reserve Bank of India. [GU BCom 2022, 2024]
Answer: The Reserve Bank of India (RBI), established in 1935, is the central bank of our country. Being the apex monetary authority, it performs various functions to regulate the financial system and ensure stability in the economy.
The Following are the Functions of a central bank:-
1. Issuing Currency Notes: The RBI has the sole authority to issue paper currency in India, except ₹1 notes and coins which are issued by the Government of India. By controlling note issue, RBI ensures uniformity, prevents counterfeit circulation, and builds public confidence in the currency system.
2. Monetary Policy Implementation: The RBI frames and implements the monetary policy of the country with the aim of controlling inflation, ensuring price stability, and supporting economic growth. For this purpose, it uses instruments like Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), Repo Rate, Reverse Repo Rate, and Open Market Operations.
3. Regulation and Supervision of Banks: The RBI acts as the regulator of the banking system in India. It provides licenses to new banks, monitors their functioning, conducts inspections, and ensures that banks maintain the required cash reserves. This supervision promotes stability and protects depositors’ interests.
4. Control of Credit: To maintain balance in the economy, the RBI controls the flow of credit. It applies quantitative measures like CRR, SLR, Repo Rate, and Open Market Operations to control the total volume of credit, and qualitative measures like credit rationing and margin requirements to regulate the direction of credit towards priority sectors.
5. Lender of Last Resort: When commercial banks face a financial crisis or fail to meet their obligations, the RBI acts as a lender of last resort. It provides emergency loans to such banks, thereby preventing their collapse and ensuring stability in the banking system.
6. Foreign Exchange Management: The RBI manages India’s foreign exchange reserves and controls foreign transactions under the Foreign Exchange Management Act (FEMA), 1999. It stabilizes the external value of the rupee and ensures smooth international trade by preventing excessive fluctuations in exchange rates.
7. Maintaining Financial Stability: The RBI plays a crucial role in maintaining confidence in the financial system. It ensures that banks operate soundly, provides liquidity in times of need, and safeguards the economy from financial crises. By doing this, it protects the interests of both depositors and investors.
8. Developmental Functions: Apart from regulatory functions, the RBI also promotes economic development. It supports agriculture, industry, and other priority sectors by providing refinance facilities. It also promotes financial inclusion by encouraging rural credit institutions and spreading banking services to underdeveloped areas.
Conclusion
Thus, the Reserve Bank of India, as the central bank, performs a wide range of functions—from issuing currency and controlling credit to maintaining financial stability and promoting development. It is the backbone of the Indian financial system and ensures smooth functioning of the economy.
5.“Commercial banks are the backbone of economic development.” Explain.
Answer: Commercial banks are financial institutions that accept deposits, provide loans, and offer various financial services to the public. They play a vital role in the growth of an economy by mobilizing savings and converting them into productive investments.
Mobilization of Savings: Commercial banks encourage people to save by offering deposit schemes like savings accounts, fixed deposits, and recurring deposits. These savings are collected and used for lending to businesses and individuals, thus creating capital for economic development.
Providing Credit for Investment: Banks provide loans and advances to businesses, industries, and entrepreneurs. This credit helps in establishing new industries, expanding existing businesses, and financing agriculture, thereby generating employment and increasing production.
Promoting Trade and Commerce: Commercial banks facilitate trade by providing financial services such as letters of credit, bank drafts, and foreign exchange services. This supports both domestic and international trade, which is essential for economic growth.
Development of Agriculture and Industry: Banks provide specialized credit to farmers for seeds, fertilizers, and equipment, and to industries for machinery and working capital. This encourages the development of agriculture and industrial sectors, which are key drivers of economic development.
Encouraging Entrepreneurship: By providing loans and financial guidance, banks help entrepreneurs start new businesses and expand existing ones. This leads to innovation, higher productivity, and overall economic progress.
Stability and Financial Inclusion: Banks ensure the safe keeping of money, provide financial services to rural and underdeveloped areas, and promote financial literacy. This brings more people into the organized financial system, contributing to balanced economic growth.
Conclusion
Commercial banks are indeed the backbone of economic development because they mobilize savings, provide credit, support trade and industry, promote entrepreneurship, and ensure financial stability. Without their active participation, economic growth would be slow and unorganized.
6. Explain the Differences between scheduled and non-scheduled banks with examples. [GU BCom 2022]
Answer: Banks in India are broadly classified into Scheduled Banks and Non-Scheduled Banks.
Scheduled Banks: Scheduled banks are those included in the Second Schedule of the Reserve Bank of India Act, 1934. To be included, a bank must fulfill the following conditions:
It should have a paid-up capital and reserves of at least ₹5 lakhs.
It must assure the RBI that its operations are not detrimental to the interest of depositors.
It should be a corporation or cooperative society, not a partnership or sole proprietorship.
Scheduled banks enjoy several privileges, such as the ability to borrow from the RBI, coverage under the Deposit Insurance Scheme, and participation in the credit guarantee scheme. They must also follow all rules and directives issued by the RBI. Examples of scheduled banks include State Bank of India (SBI), HDFC Bank, ICICI Bank, etc.
Non-Scheduled Banks: Non-scheduled banks are not included in the Second Schedule of the RBI Act. They do not enjoy the borrowing facilities from the RBI and are not necessarily covered under the deposit insurance or credit guarantee schemes. These banks usually operate on a smaller scale and have limited resources. Examples include some regional rural banks and cooperative banks that do not meet the criteria for scheduled status.
Differences Between Scheduled and Non-Scheduled Banks
Conclusion: Scheduled banks are larger, regulated, and enjoy RBI support, whereas non-scheduled banks are smaller, less regulated, and do not enjoy RBI facilities. Both types serve different purposes in the banking system.
7. What is universal banking? Discuss its advantages and disadvantages. [GU BCom 2024]
Answer: Universal banking is a banking system in which a bank provides a wide range of financial services under one roof. This means that a bank not only performs the traditional functions of accepting deposits and granting loans but also offers services such as investment, insurance, mutual funds, leasing, merchant banking, foreign exchange, and financial advisory services. In other words, a universal bank combines the functions of a commercial bank, investment bank, and other financial institutions.
Advantages of Universal Banking
One-Stop Financial Services: Customers can access a variety of financial services at a single place, saving time and effort.
Efficient Use of Resources: Banks can use their resources more efficiently by offering multiple services, reducing operational costs.
Diversification of Risk: By engaging in different types of financial activities, universal banks can spread their risk and reduce dependence on a single source of income.
Promotes Economic Development: Universal banks provide finance for industries, trade, agriculture, and infrastructure, contributing to overall economic growth.
Convenience for Customers: Customers benefit from easy access to loans, investments, insurance, and other services without approaching multiple institutions.
Disadvantages of Universal Banking
Conflict of Interest:
Offering multiple services under one roof may lead to conflicts, e.g., a bank giving loans and simultaneously promoting investment products.Risk of Overextension: Banks may take on too many activities, increasing operational and financial risk.
Regulatory Challenges: Managing and supervising diverse activities is complex for regulators like the RBI, increasing the chances of malpractice or mismanagement.
Potential Neglect of Traditional Banking: Focus on non-traditional services like investment banking or insurance might reduce attention to basic banking services for ordinary customers.
Thus, Universal banking allows banks to provide a wide range of financial services under one roof, offering convenience, efficiency, and risk diversification. However, it also brings risks of overextension, conflicts of interest, and regulatory challenges, which need careful management to ensure financial stability.
8. Discuss the role of merchant banking in India.
Answer: Merchant banking refers to a set of financial services provided by specialized institutions to assist companies in raising capital, managing finances, and advising on investment decisions. In India, merchant banking has grown significantly since the 1980s, supporting the development of industries and capital markets.
Raising Capital for Companies: Merchant banks help businesses raise capital through equity, debentures, bonds, or other financial instruments. They act as intermediaries between investors and companies, ensuring smooth fund mobilization.
Underwriting Services: They provide underwriting services by guaranteeing the purchase of securities in case the public subscription falls short. This reduces the financial risk for companies issuing securities.
Corporate Advisory Services: Merchant banks advise companies on mergers, acquisitions, takeovers, restructuring, and financial planning, helping them make strategic business decisions.
Portfolio and Investment Management: They assist in managing investments for corporations and high-net-worth individuals, ensuring optimal returns and risk management.
Issue Management: Merchant banks manage the process of issuing new securities, including drafting prospectuses, coordinating with regulators, pricing securities, and marketing them to investors.
Facilitating Foreign Investment: They assist foreign investors in investing in Indian companies and guide Indian companies in raising funds from international markets.
Promoting Industrial Growth: By providing financial services, merchant banks help industries secure the necessary funds for expansion, modernization, and technology upgradation, contributing to overall economic development.
Conclusion
In India, merchant banks play a crucial role in the development of capital markets and industries by raising funds, underwriting issues, providing advisory services, managing investments, and promoting industrial growth. They act as a bridge between investors and corporations, ensuring the efficient flow of capital in the economy.
9. Explain the agency functions and general utility functions of commercial banks. [GU BCom 2021, 2023]
Answer: See Q.1 of Long Answer Type Questions - 10 Marks
10. Discuss the significance of cooperative banks in rural development.
Answer: Cooperative banks are financial institutions established to provide banking services to rural and semi-urban areas, especially to farmers, agricultural laborers, and artisans. They play an important role in promoting rural development by ensuring access to credit, encouraging savings, and supporting economic activities in villages.
The following are the significant roles of cooperative banks in rural development:
Providing Credit to Farmers and Rural Entrepreneurs: Cooperative banks give short-term, medium-term, and long-term loans to farmers for purchasing seeds, fertilizers, machinery, and livestock. They also provide credit to rural artisans and small businesses, helping in agricultural and entrepreneurial development.
Encouraging Savings Habit: These banks mobilize savings from rural households by offering savings accounts, recurring deposits, and fixed deposits, which instills a culture of financial discipline among rural people.
Promoting Agricultural Development: By providing timely and affordable credit, cooperative banks enable farmers to adopt modern farming techniques, irrigation facilities, and high-yield seeds, increasing productivity and agricultural output.
Supporting Small and Cottage Industries:
Cooperative banks lend to small-scale industries, handicrafts, and cottage industries, promoting rural employment and income generation.Financial Inclusion: Cooperative banks make banking services accessible to rural populations who are often excluded from commercial banking, helping them participate in the organized financial system.
Reducing Exploitation by Moneylenders: By offering cheap and timely credit, cooperative banks reduce dependence on private moneylenders who charge high-interest rates, protecting rural borrowers from exploitation.
Conclusion
Cooperative banks are essential for rural development as they provide credit, encourage savings, promote agriculture and small industries, ensure financial inclusion, and reduce exploitation. They act as a bridge between the financial system and the rural economy, fostering overall economic growth in villages.
11. What is E-Banking? Explain its functions, types, advantages, and limitations.
Answer: E-Banking or Electronic Banking refers to the provision of banking services through information and communication technology. It allows customers to perform banking transactions and access financial services without physically visiting a bank. With the growth of computers, internet, and online services, E-Banking has become a key component of modern banking. It is information-based, speedy, and boundaryless, enabling clients to manage their finances efficiently.
The following are the main functions of E-Banking:
Account Inquiry: Clients can check their account balance, view transaction history, and download account statements online.
Funds Transfer: Clients can transfer funds between their own accounts or to other persons’ accounts, including bank-to-securities transfers.
Foreign Exchange Transactions: Clients can trade foreign exchange, cancel orders, and check exchange rates online.
B2C Payments: Customers can make online payments for shopping or other services and receive real-time feedback from the bank.
Client Services and Account Management: Clients can modify login passwords, update account information, freeze or delete cards, and manage account limits.
Reporting Loss of Account: Clients can report stolen or lost credit cards or passbooks locally through the E-Banking system.
Types of E-Banking
The following are the main types of E-Banking services:
ATM Banking: Deposits, withdrawals, fund transfers, and payments at ATMs.
Internet Banking: Buying goods or services online using debit/credit cards without carrying cash or cheques.
Telephone Banking: Performing banking operations such as balance inquiry, inter-account transfers, and bill payments via phone.
Advantages of E-Banking
The following are the key benefits of E-Banking:
Real-time account information and summary of transactions.
Quick and efficient fund transfers, including one-to-one and bulk transfers.
Ability to download account statements in formats compatible with ERP systems for auto-reconciliation.
Online submission of banking requests like cheque book issuance, stop payment, demand drafts, opening fixed deposits, and letters of credit.
Convenient bill payments for telephone, electricity, mobile, and insurance services.
Online shopping payments through secure banking portals, ensuring safety and convenience.
Customers can integrate bank systems with their own financial systems for efficient cash flow management.
Limitations of E-Banking
The following are the main limitations of E-Banking:
Security Risks: ATMs and online transactions may be subject to fraud or hacking.
Card Misuse: Credit and debit cards can be misused by fraudsters.
Online Transaction Risks: Danger arises if card details are disclosed during online shopping.
Conclusion
E-Banking has revolutionized the banking sector, making it more efficient, convenient, and accessible. It allows customers to manage their finances anywhere, anytime. However, it also comes with risks of fraud and security concerns, which require careful management by both banks and customers.