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CHAPTER I
BANKING IN INDIA

Banks
Banks are financial intermediaries, which receive money from the people who have surplus
funds and lend to others who are in need by way of loans or investments.
Banking is defined under section 5(b) of the Banking Regulation Act, 1949, which states as
follows. Accepting for the purpose of lending or investment, deposits of money from the
public repayable on demand and withdrawable by cheque, draft or otherwise.
So the core functions of banking
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Accepting deposits.
Lending and investment.
The deposits are withdrawable only on demand.
It can be withdrawn by cheques, drafts or by other methods.

But it has to be understood that banking itself has undergone much change. Now banks
undertake a lot of other activities like selling insurance mutual funds, insurance policies
which is comprehensively known as selling of third party products. They also do merchant
banking, selling gold coins etc. These activities contribute towards the profits by way of
commission etc which are known by the name fee based activities and grouped under the
head other income in the balance sheet of banks.
Basic tenets in banking are:
Financial intermediation
Banks accept money from the depositors by way of deposits. They invest or lend this money
to those who are in need for the funds. In the process they make a profit (earn income) which
is the difference between the interest they pay on the deposits they accept and the interest
they charge on the advance they make or the interest they earn on the investments made by
them. But in the process they take a risk. They face the risk of default of repayment by the
borrowers, which is called credit risk.
Trust/confidence of the public
Only if the public has trust in the banks, they will put the money in the bank. They should
feel that their money is safe in the bank and they are dependable in the management of the
funds and they will keep the commitments, which they make to the customers. Only if the
people have the confidence in the bank they will keep the money with them by way of
deposits or otherwise.

Liquidity of the bank

Banks should be in a position to repay the deposits as and when demanded by the depositors
based on the terms of acceptance of such deposits. Either the bank should have the money
with them or they should be in a position to arrange the same.
Solvency of the bank
It denotes the long-term financial soundness of the bank. It is determined on the basis of the
various policies of the bank such as its lending and investment policies. The quality of the
assets created by it. The professionalism by which its affairs are managed. It can be anlysed
by looking at various ratios like capital adequacy ratio, the ratio of performing assets etc.
Profitability of the bank
Like any other business banks also have to make profits in order to ensure its growth. The
profitability comes from the interest income it earns which is indicated by the spread, that is
the difference between the interest it earns on the advances and the interest it pays on the
deposits. Banks also get the profit from other income such as the exchange and commissions,
which it gets while issuing drafts, transferring funds, exchanging foreign currencies etc.
Structure of Banking in India
Reserve Bank of India (the Regulator)
Public sector banks which includes:
a) State Bank of India and its Associate groups (State Bank of Travancore, State Bank of
Mysore etc.)
b) Nationalised banks
Private sector banks which includes;
a) Old private sector banks
b) New private sector banks
Foreign banks
Cooperative banks
Regional Rural banks
Reserve Bank of India is the apex bank in India. It regulates all the banks in India.