Definition of banks
In India, the definition of the business of banking has been given in the Banking Regulation Act, (BR Act), 1949. According to Section 5(c) of the BR Act, 'a banking company is a company which transacts the business of banking in India.' Further, Section 5(b) of the BR Act defines banking as, 'accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal, by cheque, draft, and order or otherwise.' This definition points to the three primary activities of a commercial bank which distinguish it from the other financial institutions. These are: (i) maintaining deposit accounts including current accounts, (ii) issue and pay cheques, and (iii) collect cheques for the bank's customers.
1.1 Banking Industry Overview
Today, banks play a very important role in the economic growth of the country. The health of the economy is closely related to the soundness of the banking system. The activities of the banks lead to a stronger economic growth.
Bank is the main confluence that maintains and controls the “flow of money” to make the lending mechanism possible. Government uses it to control the flow of money by managing Cash Reserve Ratio (CRR) and thereby influencing the inflation level. The functions of banks include accepting deposits from the public and private institution and then to direct them as loans and advances to various companies for growth and development of industries. The banks take the deposits at a lower rate of interest and give loans at a higher rate, thus constituting the only source of income for banks.
Banking in India has undergone startling changes in terms of growth and structure. Organized banking was active in India since the establishment of The General Bank of India in 1786. The Reserve Bank of India (RBI) was established as the central bank in1955. The Imperial Bank of India, the largest bank at that time, was taken over by the government to form state owned, State bank of India (SBI). RBI undertook an exercise to reduce the fragmentation in the Indian Banking Industry by merging weaker banks with stronger ones. The total number of banks reduced from 566 in 1951 to 85 in 1969.
With the objective of reaching out to masses and servicing credit needs of all the industries, the government nationalized 14 large banks in 1969 followed by another 6 banks in 1980. This period saw an enormous growth in the banking sector. However, the economic reforms unleashed by the government in 1990s played a significant role in the growth of Indian economy. Entry of new private banks was permitted under RBI guidelines. A number of liberalized and deregulation measures like efficiency, asset quality and profitability were introduced to bring Indian banks in line with best international practices. With a view of giving the operational flexibility and functional autonomy, partial privatization was authorized, thus reducing the stake of government to 51%.
Today, Indian banking system is among the best in the world and is growing at a very high pace. According to FICCI survey:
Newly granted autonomy would certainly make public sector banks more competitive and profitable.
Up gradation of technology being used would certainly make Indian banks more competitive.
Major Banking Operations
The main operations of a bank can be segregated into three main areas: (i) Balancing Profitability with Liquidity Management (ii) Management of Reserves (iii) Creation of Credit.
Balancing Profitability with Liquidity Management
Banks are commercial concerns which provide various financial services to customers in return for payments in one form or another, such as interest, discount fees, commission and so on. Their objective is to make profits. However, what distinguishes them from other business concerns is the degree to which they have to balance the principle of profit...
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