INDEX

SR.
NO.

CHAPTER

1.

Introduction

2.

Importance Of Banking Sector In India

3.

Product And Service Offered By Bank In

India

4.

Growth Of Banking Sector In Last

Decade

5.

Impact Of Marketing To The Growth Of

Banking Sector In India

6.

Emerging Risk In Banking Sector And

Risk Management By Banks

PAGE
NO.

CHAPTER
INTRODUCTION
A Bank is a financial intermediary that creates credit by lending money to a borrower,
thereby creating a corresponding deposit on the bank's balance sheet. Lending activities can be
performed either directly or indirectly through capital markets. Due to their importance in the
financial system and influence on national economies, banks are highly regulated in most
countries. Most nations have institutionalized a system known as fractional reserve banking
under which banks hold liquid assets equal to only a portion of their current liabilities. In
addition to other regulations intended to ensure liquidity, banks are generally subject to minimum
capital requirements based on an international set of capital standards, known as the Basel
Accords.
Banking in its modern sense evolved in the 14th century in the rich cities of Renaissance Italy
but in many ways was a continuation of ideas and concepts of credit and lending that had their
roots in the ancient world. In the history of banking, a number of banking dynasties notably,
the Medicis, the Fuggers, the Welsers, the Berenbergs and the Rothschilds have played a
central role over many centuries. The oldest existing retail bank is Monte dei Paschi di Siena,
while the oldest existing merchant bank is Berenberg Bank
According to the Reserve Bank of India (RBI), the banking sector in India is sound, adequately
capitalised and well-regulated. Indian financial and economic conditions are much better than in
many other countries of the world. Credit, market and liquidity risk studies show that Indian
banks are generally resilient and have withstood the global downturn well.
With a sense of optimism slowly creeping in, the banking industry expects that 2015 will bring
better growth prospects. This optimism stems from factors such as the Government working hard
to revitalise the industrial growth in the country and the RBI initiating a number of measures that
would go a long way in helping the banks to restructure. The recent announcements of RBI, it is
felt, are a clear pointer to the future of the restructured domestic banking industry.
According to Banking Encyclopedia, Bank is a financial institution which receives deposits
from the public and lends them for investment purpose i.e., deposits of money and advances of
the Main function of banks, but in the era of globalization banks indulges themselves in many
activities like Insurance, Mutual Fund Business and Investment in Stock Exchanges. These
activities of banking are considered as Para Banking Activities.

DEFINITION

The Definition of a Bank varies from country to country. See the relevant country pages under
for more information.Under English common law, a banker is defined as a person who carries on
the business of banking, which is specified as:

Conducting current accounts for his customers,

Paying cheques drawn on him/her, and

Collecting cheques for his/her customers.

In most common law jurisdictions there is a Bills of Exchange Act that codifies the law
in relation to negotiable instruments, including cheques, and this Act contains a statutory
definition of the term banker: banker includes a body of persons, whether incorporated or
not, who carry on the business of banking' (Section 2, Interpretation). Although this
definition seems circular, it is actually functional, because it ensures that the legal basis
for bank transactions such as cheques does not depend on how the bank is structured or
regulated.
The business of banking is in many English common law countries not defined by statute
but by common law, the definition above. In other English common law jurisdictions
there are statutory definitions of the business of banking or banking business. When
looking at these definitions it is important to keep in mind that they are defining the
business of banking for the purposes of the legislation, and not necessarily in general. In
particular, most of the definitions are from legislation that has the purpose of regulating
and supervising banks rather than regulating the actual business of banking. However, in
many cases the statutory definition closely mirrors the common law one. Examples of
statutory definitions:

"Banking Business" means the business of receiving money on current or deposit

account, paying and collecting cheques drawn by or paid in by customers, the making
of advances to customers, and includes such other business as the Authority may
prescribe for the purposes of this Act; (Banking Act (Singapore), Section 2,
Interpretation).

"Banking Business" means the business of either or both of the following:

1. Receiving from the general public money on current, deposit, savings or
other similar account repayable on demand or within less than [3 months] ...
or with a period of call or notice of less than that period;

2. Paying or collecting checks drawn by or paid in by customers.

Since the advent of EFTPOS (Electronic Funds Transfer at Point Of Sale), direct credit, direct
debit and internet banking, the cheque has lost its primacy in most banking systems as a payment
instrument. This has led legal theorists to suggest that the cheque based definition should be
broadened to include financial institutions that conduct current accounts for customers and
enable customers to pay and be paid by third parties, even if they do not pay and collect checks.

HISTORY
Banking begins with the first prototype banks of merchants of the ancient world, which made
grain loans to farmers and traders who carried goods between cities. This began around 2000 BC
in Assyria and Babylonia. Later, in ancient Greece and during the Roman Empire, lenders based
in temples made loans and added two important innovations: they accepted deposits and changed
money. Archaeology from this period in ancient China and India also shows evidence of money
lending activity.
The origins of modern banking can be traced to medieval and early Renaissance Italy, to the rich
cities in the north like Florence, Lucca, Siena, Venice and Genoa. The Bardi and Peruzzi families
dominated banking in 14th-century Florence, establishing branches in many other parts of
Europe. One of the most famous Italian banks was the Medici Bank, set up by Giovanni di Bicci
de' Medici in 1397.The earliest known state deposit bank, Banco di San Giorgio (Bank of St.
George), was founded in 1407 at Genoa, Italy.
Modern banking practices, including fractional reserve banking and the issue of banknotes,
emerged in the 17th and 18th centuries. Merchants started to store their gold with the goldsmiths
of London, who possessed private vaults, and charged a fee for that service. In exchange for each
deposit of precious metal, the goldsmiths issued receipts certifying the quantity and purity of the
metal they held as a bailee; these receipts could not be assigned, only the original depositor could
collect the stored goods.
Gradually the goldsmiths began to lend the money out on behalf of the depositor, which led to
the development of modern banking practices; promissory notes (which evolved into banknotes)
were issued for money deposited as a loan to the goldsmith.The goldsmith paid interest on these
deposits. Since the promissory notes were payable on demand, and the advances (loans) to the
goldsmith's customers were repayable over a longer time period, this was an early form of
fractional reserve banking. The promissory notes developed into an assignable instrument which
could circulate as a safe and convenient form of money backed by the goldsmith's promise to
pay,allowing goldsmiths to advance loans with little risk of default.Thus, the goldsmiths of
London became the forerunners of banking by creating new money based on credit.

The Bank of England was the first to begin the permanent issue of banknotes, in 1695. The Royal
Bank of Scotland established the first overdraft facility in 1728. By the beginning of the 19th
century a bankers' clearing house was established in London to allow multiple banks to clear
transactions. The Rothschilds pioneered international finance on a large scale, financing the
purchase of the Suez canal for the British government.

TYPES OF BANKS
Banks activities can be divided into:

Retail Banking, dealing directly with individuals and small businesses;

Business Banking, providing services to mid-market business;

Corporate Banking, directed at large business entities;

Private Banking, providing wealth management services to high-net-worth individuals

and families;

Investment Banking, relating to activities on the financial markets.

Most banks are profit-making, private enterprises. However, some are owned by government, or
are non-profit organizations.

Commercial Banks: The term used for a normal bank to distinguish it from an investment
bank. After the Great Depression, the U.S. Congress required that banks only engage in banking
activities, whereas investment banks were limited to capital market activities. Since the two no
longer have to be under separate ownership, some use the term "commercial bank" to refer to a
bank or a division of a bank that mostly deals with deposits and loans from corporations or large
businesses.

Community Banks: locally operated financial institutions that empower employees to make
local decisions to serve their customers and the partners.

Community Development Banks: regulated banks that provide financial services and
credit to under-served markets or populations.

Land Development Banks: The special banks providing long-term loans are called land
development banks (LDB). The history of LDB is quite old. The first LDB was started at Jhang
in Punjab in 1920. The main objective of the LDBs are to promote the development of land,

agriculture and increase the agricultural production. The LDBs provide long-term finance to
members directly through their branches.[19]

Credit Unions Or Co-operative Banks: not-for-profit cooperatives owned by the

depositors and often offering rates more favorable than for-profit banks. Typically, membership
is restricted to employees of a particular company, residents of a defined area, members of a
certain union or religious organizations, and their immediate families.

Postal Savings Banks: savings banks associated with national postal systems.
Private Banks: banks that manage the assets of high-net-worth individuals. Historically a
minimum of USD 1 million was required to open an account, however, over the last years many
private banks have lowered their entry hurdles to USD 250,000 for private investors.

Offshore Banks: banks located in jurisdictions with low taxation and regulation. Many
offshore banks are essentially private banks.

Savings Bank: in Europe, savings banks took their roots in the 19th or sometimes even in
the 18th century. Their original objective was to provide easily accessible savings products to all
strata of the population. In some countries, savings banks were created on public initiative; in
others, socially committed individuals created foundations to put in place the necessary
infrastructure. Nowadays, European savings banks have kept their focus on retail banking:
payments, savings products, credits and insurances for individuals or small and medium-sized
enterprises. Apart from this retail focus, they also differ from commercial banks by their broadly
decentralized distribution network, providing local and regional outreachand by their socially
responsible approach to business and society.

Building Societies And Landesbanks: institutions that conduct retail banking.

Ethical Banks: banks that prioritize the transparency of all operations and make only what
they consider to be socially responsible investments.

A Direct Or Internet-Only Bank is a banking operation without any physical bank

branches, conceived and implemented wholly with networked computers.

TYPES OF INVESTMENT BANKS

Investment banks "Underwrite" (Guarantee The Sale Of) stock and bond issues, trade for their
own accounts, make markets, provide investment management, and advise corporations on
capital market activities such as mergers and acquisitions.

Merchant banks were traditionally banks which engaged in trade finance. The modern
definition, however, refers to banks which provide capital to firms in the form of shares rather
than loans. Unlike venture caps, they tend not to invest in new companies.

BOTH COMBINED
Universal banks, more commonly known as financial services companies, engage in several of
these activities. These big banks are very diversified groups that, among other services, also
distribute insurance hence the term bancassurance, a portmanteau word combining "banque or
bank" and "assurance", signifying that both banking and insurance are provided by the same
corporate entity.

OTHER TYPES OF BANKS

Central Banks are normally government-owned and charged with quasi-regulatory
responsibilities, such as supervising commercial banks, or controlling the cash interest rate. They
generally provide liquidity to the banking system and act as the lender of last resort in event of a
crisis.
Islamic Banks adhere to the concepts of Islamic law. This form of banking revolves around
several well-established principles based on Islamic canons. All banking activities must avoid
interest, a concept that is forbidden in Islam. Instead, the bank earns profit (markup) and fees on
the financing facilities that it extends to customers.

FUNCTIONS/ROLE OF BANK
These functions of banks are explained in following paragraphs of this article.

Primary Functions of Banks

The primary functions of a bank are also known as banking functions. They are the main
functions of a bank.
These primary functions of banks are explained below.

1. Accepting Deposits
The Bank collects deposits from the public. These deposits can be of different types, such
as :-

1. Saving Deposits
2. Fixed Deposits
3. Current Deposits
4. Recurring Deposits

A. Saving Deposits
This type of deposits encourages saving habit among the public. The rate of interest
is low. At present it is about 4% p.a. Withdrawals of deposits are allowed subject to certain
restrictions. This account is suitable to salary and wage earners. This account can be opened
in single name or in joint names.

B. Fixed Deposits
Lump sum amount is deposited at one time for a specific period. Higher rate of interest is
paid, which varies with the period of deposit. Withdrawals are not allowed before the expiry of
the period. Those who have surplus funds go for fixed deposit.

C. Current Deposits
This type of account is operated by businessmen. Withdrawals are freely allowed. No
interest is paid. In fact, there are service charges. The account holders can get the benefit of
overdraft facility.

D. Recurring Deposits
This type of account is operated by salaried persons and petty traders. A certain sum of
money is periodically deposited into the bank. Withdrawals are permitted only after the expiry of
certain period. A higher rate of interest is paid.

2. Granting of Loans and Advances

The bank advances loans to the business community and other members of the public.
The rate charged is higher than what it pays on deposits. The difference in the interest rates
(lending rate and the deposit rate) is its profit.

The types of bank loans and advances are :-

1. Overdraft
2. Cash Credits
3. Loans
4. Discounting of Bill of Exchange
A. Overdraft
This type of advances are given to current account holders. No separate account is
maintained. All entries are made in the current account. A certain amount is sanctioned as
overdraft which can be withdrawn within a certain period of time say three months or so. Interest
is charged on actual amount withdrawn. An overdraft facility is granted against a collateral
security. It is sanctioned to businessman and firms.

B. Cash Credits
The client is allowed cash credit upto a specific limit fixed in advance. It can be given to
current account holders as well as to others who do not have an account with bank. Separate cash
credit account is maintained. Interest is charged on the amount withdrawn in excess of limit. The
cash credit is given against the security of tangible assets and / or guarantees. The advance is
given for a longer period and a larger amount of loan is sanctioned than that of overdraft.

C. Loans
It is normally for short term say a period of one year or medium term say a period of five
years. Now-a-days, banks do lend money for long term. Repayment of money can be in the form
of installments spread over a period of time or in a lumpsum amount. Interest is charged on the
actual amount sanctioned, whether withdrawn or not. The rate of interest may be slightly lower
than what is charged on overdrafts and cash credits. Loans are normally secured against tangible
assets of the company.

D. Discounting of Bill of Exchange

The bank can advance money by discounting or by purchasing bills of exchange both
domestic and foreign bills. The bank pays the bill amount to the drawer or the beneficiary of the
bill by deducting usual discount charges. On maturity, the bill is presented to the drawee or
acceptor of the bill and the amount is collected.

 Secondary Functions of Banks

The bank performs a number of secondary functions, also called as non-banking
functions.
These important secondary functions of banks are explained below.

1. Agency Functions
The bank acts as an agent of its customers. The bank performs a number of agency functions
which includes :-

Transfer of Funds
Collection of Cheques
Periodic Payments
Portfolio Management

Periodic Collections

Other Agency Functions

A. Transfer of Funds
The bank transfer funds from one branch to another or from one place to another.

B. Collection of Cheques
The bank collects the money of the cheques through clearing section of its customers.
The bank also collects money of the bills of exchange.

C. Periodic Payments

On standing instructions of the client, the bank makes periodic payments in respect of
electricity bills, rent, etc.

D. Portfolio Management
The banks also undertakes to purchase and sell the shares and debentures on behalf of the
clients and accordingly debits or credits the account. This facility is called portfolio
management.

E. Periodic Collections
The bank collects salary, pension, dividend and such other periodic collections on behalf
of the client.

F. Other Agency Functions

They act as trustees, executors, advisers and administrators on behalf of its clients. They
act as representatives of clients to deal with other banks and institutions.

2. General Utility Functions

The Bank also performs general utility functions, such as :o Issue of Drafts, Letter of Credits, etc.
o Locker Facility
o Underwriting of Shares
o Dealing in Foreign Exchange
o Project Reports
o Social Welfare Programmes
o Other Utility Functions

A. Issue of Drafts and Letter of Credits

Banks issue drafts for transferring money from one place to another. It also issues letter
of credit, especially in case of, import trade. It also issues travellers' cheques.

B. Locker Facility
The bank provides a locker facility for the safe custody of valuable documents, gold
ornaments and other valuables.

C. Underwriting of Shares
The bank underwrites shares and debentures through its merchant banking division.

D. Dealing in Foreign Exchange

The commercial banks are allowed by RBI to deal in foreign exchange.

E. Project Reports
The bank may also undertake to prepare project reports on behalf of its clients.

F. Social Welfare Programmes

It undertakes social welfare programmes, such as adult literacy programmes, public
welfare campaigns, etc.

G. Other Utility Functions

It acts as a referee to financial standing of customers. It collects creditworthiness
information about clients of its customers. It provides market information to its customers, etc. It
provides travellers' cheque facility.