Unit – 1: Commercial Banking in India
Short Answer type Questions and Answers (1/2 Marks)
1. Mention the names of the Presidency Banks?
Ans: (i) The Bank of Bengal (1809). (ii) The Bank of Bombay (1840) and (iii) The Bank of Madras (1843).
2. In which year the Imperial Bank of India Act was passed?
Ans: The Imperial Bank of India Act was passed in 1920.
3. In which year the Imperial Bank of India came into existence?
Ans: On 27th January 1921.
4. In which year the Imperial Bank of India was nationalized?
Ans: On July 1, 1955 and it is renamed as state bank of India.
5. How many Associate Banks of SBI are there?
Ans: There are at present 6 Associated Banks of SBI.
6. How many public sector banks in India?
Ans: 27 for example SBI, UBI, PNB, BOB etc.
7. Give two example of Private Sector Bank in India?
Ans: The Private Sectors Bank are AXIS Bank Limited, Yes Bank Limited, South India Bank Limited, and ICICI Bank Limited.
8. In which year the Lead Bank Scheme introduce?
Ans: The Lead Bank Scheme was introduced in December, 1969.
9. Mention one point of difference between Group Banking and Chain Banking system?
Ans: Group banking is that system of banking in which two or more banks are directly or indirectly controlled by an association, trust or business corporation but Chain banking is a system of banking in which two or more banks are controlled by an individual or a group of individuals or members of a family.
10. How was the Imperial Bank of India formed?
Ans: According to the provision of Imperial Bank of India Act 1920, the Imperial Bank was established by amalgamating the three presidency bank i.e. Bank of Bengal (1806), Bank of Bombay (1840), and Bank of Madras (1843). It came into existence on 27th January 1921.
11. Give two examples of public sectors banks?
Ans: The example of public sectors banks are as follows: The Bank of India, The Bank of Baroda, United Bank of India, and The Union Bank of India.
12. What was the previous name of SBI?
Ans: The previous name of SBI was Imperial Bank of India.
13. In which schedule of RBI Act, the scheduled Banks are listed?
Ans: In the Second Schedule of the RBI Act, 1934.
14. In which year the SBI nationalized?
Ans: On 1st July 1955.
15. In which year fourteen Indian Commercial Banks were nationalized?
Ans: On 19th July, 1969.
16. How many commercial banks are nationalized at present?
Ans: At present there are 19 nationalized banks in India.
17. How many private sectors bank in India?
18. Mention two foreign banks leading in India?
Ans: These are: Bank of Tokyo, Standard Chartered Bank, and City Bank.
19. What do you mean by scheduled banks?
Ans: Scheduled banks refer to those banking institutions whose names are included in the Second Schedule of the Reserve Bank of India Act, 1934. Moreover, the banking company may included in scheduled list only after must fulfill the some conditions.
20. What do you mean by Non-Scheduled banks?
Ans: Non-Scheduled banks refer to those banking institutions, whose names do not appear in the Second Schedule of the RBI Act, 1934. Non-Scheduled banks were engaged in lending money discounting and collecting bills and in providing various agency services.
21. What are Foreign Banks?
Ans: The banks which are incorporated outside under the law of home country but have a place of business in other country are called foreign banks.
22. What do you mean by Nationalization of Banks?
Ans: Nationalisation of Banks refers to transfer of ownership and management of banks from private individuals and shareholders to the public authorities.
23. Mention subsidiary or associate banks of S.B.I.
Ans: The six subsidiaries or associate banks of S.B.I. are as follows:
a) State Bank of Bikaner and Jaipur.
b) State Bank of Hyderabad.
c) State Bank of Indore.
d) State Bank of Mysore.
e) State Bank of Patiala.
f) State Bank of Travancore.
The State Bank of Bikaner and the State Bank of Jaipur merged into one in 1963 and in July 2008 state bank of Saurashtra was merged with the State Bank of India.
24. What is the meaning of Cash Credit?
Ans: A Cash Credit is an arrangement by which a banker allows his customer having current account borrow money upto a certain limit against an agreement supported by a bond of credit against securities.
25. What is Co-operative Bank?
Ans: Co-operative banks are those banks which are established in co-operative sector. These banks have developed in India since 1919. Usually they consists of co-operative credit societies and central and State co-operative banks.
26. What are various classes of banks?
Ans: Scheduled and Non scheduled banks, Private and public sector banks.
Long answer type questions (3/5/8 Marks each)
Q. 1. Write short note on Imperial banks in India?
Ans: According to the provision of the Imperial Bank of India Act, 1920. The Imperial Bank was established by the amalgamation of the three presidency bank i.e. the Bank of Bengal (1809), Bank of Bombay (1840), the Bank of Madras (1843). In came into existence on January 27th, 1921. Most of the capital of this bank was external and its management was also in the hands of British. The Imperial Bank performed both Central and commercial banking business. The major central banking functions discharged by the bank before the establishment of the RBI were as follows:
a) It acted as the sole ‘banker to the Government and as the custodian of public funds and Government cash balances.
b) It acted as a banker’s bank.
c) It acted as an exchange bank and performed foreign trade.
In addition to these central banking functions the Imperial Bank performed ordinary commercial banking business such as:
a) Accepting deposits.
b) Making loans and advances etc.
c) Remitting funds from one place to another.
d) Providing safe custody of valuables etc.
Q. 2. Write management of Imperial Bank of India?
Ans: Under the Imperial Bank of India Act, 1920, the banks was managed by a Central Board of Directors. There were three local boards at the three presidency towns. The local boards had fairly wide powers to manage the local business. They were under the control of the Central Board.
Q. 3. Write a short note on SBI.
Ans: The State Bank of India was established under the State Bank of India Act, 1955, by nationalizing the Imperial bank of India with the object of extending banking facilities in rural areas. I came into existence on 1st July 1955. Though Imperial Bank was important banking institution in 16th April 1955, SBI bill was passed on 8th May 1955 by the Government of India. SBI was organized depending on the recommendation of All India Rural Credit Survey Committee (AIRCSC) which was appointed by RBI in 1951.
SBI is managed by Central Board of directors. In this Board, there is one chairman, one vice-chairman two managing directors and sixteen directors (Total 20 members). The head quarter of SBI is located at Mumbai and its local offices at Kolkata, Mumbai, Chennai, New Delhi, Lucknow, Ahmadabad, Hyderabad, Bhubaneswar, Bangalore, Guwahati etc. It performed all the functions performed by commercial banks. Besides it, SBI performed as an agent of RBI where there is no branch of RBI
Q. 4. State the different Central Banking functions of SBI?
Ans: As an agent of RBI, the SBI also performs certain Central Banking functions such as:
a) It Acts as the banker to the Govt.
b) It acts as the banker’s bank.
c) It maintain currency Chests.
d) It acts as a clarity house.
e) It renders certain promotional function on behalf of the Reserve Bank.
Other functions of the SBI as General Banks act
a) Accepting deposits.
b) Advancing loans.
c) Remittance of funds.
Q. 5. State the objectives of establishment of SBI?
Ans: The objectives of establishment of SBI are as follows:
a) To extend banking facilities on a large scale, particularly in the rural urban and semi-urban areas.
b) To promote agricultural finance and remove the defects in the system of agricultural finance.
c) To helps the RBI in implementing its credit policies.
d) To help the Government to pursue its broad economic policies.
Q. 6. Write short note on Lead Bank Scheme? Mention its objectives, functions and benefits.
Ans: Under the lead banking Scheme a particular bank was made responsible for a particular district to develop banking and credit in that district. This scheme was framed for surveying and developing the banking potential of all the districts in the country. This scheme was introduced by the RBI on 12 dec, 1969. The concept of a lead bank was formulated in order to involve commercial banks in rural development.
Objectives of lead bank scheme
a) Opening of bank branches in the allotted district.
b) Mobilization of savings of the allotted district.
c) Extending credit facilities in the allotted district.
d) Promoting districts development programme.
e) Co-ordination of the activities of commercial banks, co-operative banks and other financial institutions in the allotted district.
Functions of Lead Bank
a) To ascertain the scope of development of banking in the allotted district.
b) To ascertain unbanked areas within district.
c) To ascertain the credit needs of business and industrial units in the allotted district.
d) To provide financial assistance to other institutions in the allotted district.
e) To make provisions for training of small farmers so as to ensure proper utilization of funds.
f) To make provisions for storage, repairing and services of agricultural equipments.
Benefits of Lead bank
a) Branch expansion: There was found more effectiveness in branch expansion, supervision and guidance after introducing the Lead Bank Scheme.
b) Co-operation: There was found more co-operation among commercial bank, Co-operative bank, other financial institution and government authorities after introducing the Lead Bank Scheme.
c) Identification: Identification of unbanked area within district was possible through Lead Bank Scheme.
Q. 7. Explain briefly about the different forms of banking system?
Ans: The different forms of banking system are as follows:
a) Unit Banking: It is a system of banking where an independent bank undertakes banking function in a particular area. The operation of a unit bank is limited to a particular area and hence this system is also known as “localized banking. A unit bank has just one office with no branches. This banking system was originated and developed in the USA.
Merits of Unit Banking
1. Easy management and control: The management and control of unit banks is much easier due to single office and is small size.
2. Quick decision: Decision making process is quick because there is no necessity of any consultation with external authorities.
3. Local Development: Unit banking is limited to a particular area. Funds of the bank are utilized locally and are not significance to other areas.
4. Prevention of monopoly: Unit banks are generally of small size. Thus, there is no possibility of monopoly in unit banking system.
Demerits of Unit Banking
1. No distribution of risks: There is no possibility of distribution of risks because the banking operations are highly localized.
2. Less ability to face risks: The chance of failure of unit bank is more because of its limited resources, limited area of operations and lack of diversification of risks.
3. Local pressure: Since unit banks are highly localized in their business, local pressure and interferences generally disrupt their normal functioning.
4. Difference in Interest rate: Different banks charges different rate of interest depending on demand and supply of Funds in the area of operation.
b) Branch Banking: It is system of banking where large commercial bank undertakes banking activities with a network of branches. The operation of this type of bank is not limited upto a particular area but spread across the country and hence this system is also known as “delocalized bank”. A bank under this system may open branches both within and outside the country. This system was originated in England.
Merits of Branch Banking
1. Benefits of large Scale Production: Due to large scale production, the cost per unit of operation is very low in case of this system.
2. Distribution of Risks: There is a distribution of risks because the losses incurred by one branch are made up by the profits earned by other branches.
3. Effective Central Bank control: Due to presence of few big banks in the banking system, the RBI can effectively and easily regulate the activities of banks.
4. Public Confidence: Branch banking system gains greater public confidence because of its large scale operations and huge financial resources.
5. Easy transfer of funds: Since the branches of bank under branch banking are spread all over the country, it is easier and cheaper, for it to transfer funds from one place to another.
Demerit of branch banking
1. Problems of Management: The effective management and control of bank under branch banking system is difficult due to large network of branches.
2. Delay in Decision Making: Decision making is delayed because the branch manager has to consult with the head office before taking decision.
3. Ignorance of local heads: Branches follows the policies framed by the head office. The head office and the branch may not be aware of the local conditions.
4. Monopolistic tendencies: Branch banking encourages monopolistic tendencies. A few big banks can dominate and control the whole banking system.
5. Regional imbalances: Under branch banking system the financial resources collected in smaller and backward regions are transferred to the bigger industrial centre. This encourages regional imbalances in the country.
c) Chain Banking: Chain banking system is a system of banking in which two or more banks are controlled by an individual or a group of individuals or members of a family. In chain banking system, there is no intervention or control by a central organization.
d) Group Banking: It refers to the system of banking in which two or more banks are directly controlled by a corporation, an association or a business trust.
Merits of Group Banking:
Ø There is no wasteful competition.
Ø Economics of large scale operations.
Demerits of Group Banking:
Ø There is ineffective management and control.
Ø There is chain reaction system.
Q.8. Write the difference between Bank and Unit Banking?
Ans: Difference between Branch Banking and Unit Banking
Less operational freedom because branches are controlled by Head Office.
More operational freedom because of its single unit.
2. Decision Making
Delay is decision making because branches are dependent on Head Office.
Decision making is quick because External consultation is not required.
3. Rate of Interest
Rate of Interest is uniform.
Rate of interest depending on demand and supply of fund.
4. Cost of Supervision
Cost of Supervision is very high.
Cost of Supervision is less as compared to branch banking.
Funds are transferred from one branch to another.
Funds are localized in one unit.
Branch Banking encourages monopolistic tendencies in the banking system.
There is no possibility of monopoly because of its small size.
7. Concentration of power
There is concentration of power in the hands of few people.
There is no concentration of power in the hands of few people.
8. Loans and advances
Loans and advances are based on merit irrespective of status.
Loans and advances can be influenced by status.
Q. 9. Define Public and Private sector banks. Also distinguish between them.
Ans: Public Sector Banks: Public Sector banks are those banks in which the Government has at least 51% shares. Public sector banks are owned and controlled by the Government either directly or indirectly through the RBI. These banks are also known as “National Banks”. Public sector banks are classified into three categories:
a) State Bank group: It consists of the SBI and its 6 associate banks.
b) Nationalized Banks: It present there are 19 nationalized banks such as UBI, PNB, and BOI etc.
c) Regional Rural Banks (RRBs): These banks are established with the object of proceeding credit and other facilities in rural areas.
Private Sector Banks: Private Sector banks are those which are owned by private individuals or business corporations. Private sector banks may be classified into two categories:
a) Indian Banks: these banks are incorporated under the Indian companies Act. At present there are 27 Indian Private Bank. E.g. ICICI Bank Ltd, HDFC Bank Ltd, Federal Bank Ltd, Yes Bank Ltd.
b) Foreign Banks: These banks are originated outside India but have a place of business in India. At present there are 27 Foreign Banks. E.g. City Bank, Standard Chartered Bank, HSBC Bank, Bank of Tokyo.
Difference between Public Sector Banks and Private Sector Banks
Public Sector banks are owned by the Govt. either directly or through the RBI.
Private Sector banks are owned by private individuals or business corporations.
These banks are setup under the special act of Parliament.
These banks are setup under the Companies Act.
These banks aim at saving the Society.
These banks are driven by profit motive.
4. Foreign Bank
Public Sector banks does not include foreign bank.
Private Sector banks may be Indian Banks as well as foreign banks.
5. Area of operation
These banks operated in rural, Semi-urban and Urban areas.
Private Sector banks mainly operated in Semi-urban and Urban areas.
In public sector banks more that 50% of capital or full capital is supplied by the Government.
But, in private sector banks, all total capital is supplied by the shareholders of the bank.
Q.10. Write a short note on Scheduled Bank?
Ans: Scheduled bank refer to those banking institutions whose names are include in the Second schedule of the RBI Act, 1934. Under Sec. 42 (b) (a) are called scheduled bank. On the following conditions these banks are included in Second Schedule and these banks must have to fulfill these conditions:
a) The bank should have Rs. 5 lakhs as paid up capital and reserve fund.
b) It should be a corporation but must not be a partnership firm or a single owner firm.
c) The bank must have to submit its weekly return to the RBI.
d) Direct control is made providing the following advantages on the scheduled banks and RBI: - (i) Giving direct loans, (ii) Providing transfer facilities, (iii) Clearing house facility.
Q.11. Write a brief note on primary and secondary functions of banks.
Ans: Functions of Bank: Modern banks not only deal in money and credit creation, other useful functions management of foreign trade, finance etc. The meaning of modern banks is used in narrow sense of the term as commercial banks. The various functions of banks are given below:
A) Primary functions:
a) Acceptance of deposits: It is the most important function of a bank. Under this function, bank accept deposits from individuals and organizations and finances the temporary needs of firms.
b) Making loans and advances: The second important function of banks is advancing loan. The commercial bank earns interest by lending money.
c) Investments of Funds: Besides loans and advances, banks also invest apart of its funds in securities to earn extra income.
d) Credit Creations: The Bank create credit by opening an account in the name of the borrower while making advances. The borrower is allowed to withdraw money by cheque whenever he needs.
B) Secondary functions of a bank: This function is divided into two parts
1) Agency functions: These functions are performed by the banker for its own customer. For these bank changes certain commission from its customers. These functions are:
a) Remittance of Funds: Banks help their customers in transferring funds from one place to another through cheques, drafts etc.
b) Collection and payment of Credit Instruments: Banks collects and pays various credit instruments like cheques, bill of exchange, promissory notes etc.
c) Purchasing and Sale of securities: Banks undertake purchase and sale of various securities like shares, stocks, bonds, debentures etc. on behalf of their customers.
d) Income Tax Consultancy: Sometimes bankers also employ income tax experts not only to prepare income tax returns for their customer but to help them to get refund of income tax in appropriate cases.
e) Acting as Trustee and Executor: Banks preserve the wills of their customers and execute them after their death.
f) Acting as Representatives and Correspondent: Sometimes the banks act as representatives and correspondents of their customers. They get passports, travelers tickets secure passages for their customers and receive letters on their behalf.
2) General Utility functions: These are certain utility functions performed by the modern commercial bank which are:
1. Locker facility: Banks provides locker facility to their customers where they can their valuables.
2. Traveler’s cheques: Bank issue travelers cheques to help their customers to travel without the fear of theft or loss of money.
3. Gift cheque: Some banks issue gift cheques of various denominations to be used on auspicious occasions.
4. Letter of Credit: Letter of credit are issued by the banks to their customers certifying their credit worthiness. Letter of credit are very useful in foreign trade.
5. Foreign Exchange Business: Banks also deal in the business of foreign currencies.
Q.12. What is Nationalisation? What are its objectives and achievements?
Ans: Nationalisation: Nationalisation of Banks refers to transfer of ownership and management of banks from private individuals and shareholders to the public authorities. In 1969, 14 banks were nationalized. Again in 1980, 6 more banks were nationalized. In 1993, New bank is merged will Punjab National Bank. So, there are 19 nationalized banks in our country at present.
Objectives of Nationalisation:
a) Preventing concentration of economic powers in the hands of few.
b) Provide banking facilities in rural areas.
c) Mobilization of savings of rural areas.
d) Help to the agriculture industry.
e) Balanced regional development.
f) Provide adequate financial assistance to the public and private sector industry whether big or small.
g) Greater stability and control in banking sector.
Achievements of nationalisation:
a) Expansion of Bank branches: There has been a rapid increase of bank branches after nationalization. Till the end of March, 2014 number of bank branches increases to 97,010.
b) Growth of deposit: After nationalization the deposit occupied by banks was increased due to various branches in Rural, Semi-urban and urban areas.
c) Advances to priority sectors: Priority sector includes Agriculture, small business, small scale industry etc. There has been greater emphasis on those sectors now.
d) Correction of regional imbalances: After nationalization, steps have been taken to improve banking services in less developed states.
e) Advance to Agriculture: The nationalized banks have given particular importance in providing credit to agriculturists.
f) Investment in Govt. Securities: The nationalized bank has become a major source of finance for the Govt. These banks are required to invest a part of their funds in Govt. securities.
g) Developmental role of banks: Nationalized banks focuses on not only making profit, but also works for the welfare and prosperity of the society.
Q.13. Write a brief note on growth and evolution of banking in India.
Ans: Pre-Independence: The General Bank of India was set up in 1786. Next came the Bank of Hindustan and Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called them presidency Banks. These three banks were amalgamated in 1920 and the Imperial Bank of India, which started as private shareholders banks, was established with mostly European shareholders.
In 1865, the Allahabad Bank was established, and, for the first time, exclusively by Indians, Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1923, Banks of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank and Bank of Mysore were set up. The Reserve Bank of India (RBI) was established in 1935.
Post Independence: The government took major steps in the Indian Banking Sector Reforms after independence. In 1955, it nationalized the Imperial Bank of India (the State Bank of India Act) with extensive banking facilities on a large scale, especially in rural and semi-urban areas as the first phase of nationalization. It formed the State Bank of India (SBI) to as the principal agent of RBI and to handle banking transactions of the Union and the State Governments of the Country.
In 1969, seven subsidiary banks of the State Bank of India were nationalized as a major process of nationalization due to the effort of then Prime Minister Mrs. Indira Gandhi, Later in 1969, 14 Major Private Commercial Banks in the country were nationalized. Again in 1980, 6 more banks were nationalized. In 1993, New bank is merged will Punjab National Bank. So, there are 19 nationalized banks in our country at present.
The third phase of development of Indian banking introduced many more products and facilities in the banking sector in its reform measures. In 1991, under the chairmanship of M. Narsimham, a committee was set up under his name, which worked for the liberalization of banking practices.