HL COMMERCE COLLEGE (AUTONOMOUS) –

SELF FINANCE PROGRAMME

B.COM – BANKING AND FINANCIAL
SERVICES
(2024-25)
SEMESTER – I
SUB: BANKING OPERATIONS

: BY CS KOMAL KEWALRAMANI
ASSISTANT PROFESSOR
HL COMMERCE COLLEGE
 INTRODUCTION TO BANKING
• The banking sector is essential for any modern economy, serving as a key
part of the financial system that can greatly impact whether an economy
succeeds or fails.

• Banks are among the oldest financial institutions and play a crucial role in
collecting deposits from people and businesses, and then lending that money
out to various sectors of the economy.

• This process is like fueling economic growth by taking savings from

individuals and investing them where they can earn the highest returns.

• The strength of a nation's economy often depends on how well its financial
system operates, and this relies heavily on having stable and trustworthy
banks
 MEANING AND DEFINITION
• As per Section 5(l)(b) of the Banking Regulation Act, banking is defined as the
acceptance of deposits from the public for lending or investment purposes,
repayable on demand or otherwise, and withdrawable through various means like
cheques.

• Section 5(l)(c) defines a banking company as any entity conducting banking

business in India. However, companies accepting deposits solely for their own
business financing are not considered banks under this definition.

• Fundamentally, banking involves two core functions: accepting deposits from the
public and lending funds.
 A HISTORY OF BANKING IN INDIA
• Colonial Era and Early Modern Banking
• The emergence of modern banking in India began between the 18th and early
19th centuries, driven by European agency houses. Key milestones include:
• 1683: The first bank in India was set up in Madras by officers of the East
India Company.
• 1720: The Bank of Bombay, the first joint stock bank, was established in
Bombay.
• 1770: The Bank of Hindustan was set up in Calcutta by an agency house.
• 1806: The Bank of Bengal, the first Presidency bank, was established in
Calcutta to cater to modern banking needs and to provide a uniform
currency for foreign trade and British personnel remittances. The
government subscribed to 20% of its share capital.
• 1840: The Bank of Bombay was set up.
• 1843: The Bank of Madras was established. These banks were governed by
Royal Charters and were collectively known as Presidency banks.
 A HISTORY OF BANKING IN INDIA
• Formation of the Imperial Bank and Cooperative Banks
• 1921: The three Presidency banks (Bank of Bengal, Bank of Bombay, and
Bank of Madras) were amalgamated to form the Imperial Bank of India.
This bank acted as a commercial bank, a banker’s bank, and a banker to
the government, eventually becoming the State Bank of India (SBI).
• 1889: The cooperative banking movement began in India, with Shri
Vithal L. Kavthekar pioneering the urban cooperative credit movement
in the princely State of Baroda.
• 1905: The second urban cooperative bank, the Peoples’ Cooperative
Society, was established in Bangalore.
 A HISTORY OF BANKING IN INDIA
• Establishment of the Reserve Bank of India (RBI)
• 1934: The Reserve Bank of India Act was enacted to address the banking
failures during the Great Depression and to cater to the requirements of
agriculture. This act laid the foundation for a central banking authority
in India.
• 1935: The Reserve Bank of India (RBI) was established as the central
bank of the country. Initially, RBI had limited powers for control or
regulation. It aimed to regulate the issue of banknotes, maintain
reserves to secure monetary stability, and operate the credit and
currency system of the country to its advantage.
• 1949: The Reserve Bank of India was nationalized, making it a fully
government-owned institution. This nationalization allowed the RBI to
play a more significant role in the development and regulation of the
banking sector in India.
 A HISTORY OF BANKING IN INDIA
• Nationalization and Expansion
• 1955: The Imperial Bank of India was nationalized and converted into the State
Bank of India to extend banking facilities, particularly in rural and semi-urban
areas. The ownership was vested with the Reserve Bank of India (RBI), later
transferred to the Government of India.
• 1961: The Deposit Insurance Corporation Act was enacted, leading to the
creation of the Deposit Insurance Corporation of India in 1962 to ensure the
safety of deposits.
• 1969: The government nationalized 14 major private banks to promote economic
growth, regional balance, and credit flow to agriculture and other neglected
sectors. This was followed by the Lead Bank Scheme (LBS) launched by RBI in
December 1969 to mobilize deposits and enhance lending to weaker sections.
• 1980: Six more banks with deposit liabilities of `200 crore and above were
nationalized to further extend the reach of organized banking services to rural
areas.
 A HISTORY OF BANKING IN INDIA
• Reasons for Nationalization
• Support for Agricultural Sector
• Mobilize Savings
• Expansion of Banking Network
• Boost Priority Sectors

• Benefits of Nationalization
• Increased Efficiency
• Empowered Small-Scale Industries
• Boost to Agricultural Sector
• Increased Public Deposits
• Better Outreach
• Employment Opportunities
 A HISTORY OF BANKING IN INDIA

• Establishment of Financial Institutions (1982-1990)

• EXIM Bank
• National Housing Board
• NABARD
• SIDBI

• Lead Bank Scheme (LBS) (1969)

• Mobilize Deposits
• Direct Credit Towards Neglected Sections
 A HISTORY OF BANKING IN INDIA
• Reforms and Liberalization
• 1991: The Narasimham Committee I recommended comprehensive banking sector
reforms to create a viable and efficient banking system. The reforms emphasized
deregulation, liberalization, transparency, and adherence to international standards.
Initial reforms focused on cleaning up bank balance sheets and implementing clear
policies for asset classification, income recognition, loan-loss provisioning, and
investment valuation.
• 1993: Competition was introduced with the establishment of private sector banks and
the entry of foreign banks.
• 1992-1999: Public sector banks were recapitalized with government support. Weak
banks were merged with stronger ones, and public sector banks like SBI and Oriental
Bank of Commerce launched their IPOs, leading to a dilution of government
ownership.
• 2000s: The second phase of banking reforms aimed to strengthen the banking sector
through rigorous norms, improved credit delivery systems, and harmonized
regulatory frameworks.
 BANKING STRUCTURE AND SYSTEM

• The structure of the banking system varies significantly

across countries, influenced by their unique economic
conditions, political structures, and financial systems.
• Banks can be classified based on the volume of operations,
business patterns, and areas of operation, forming what is
known as a banking system.
 BANKING STRUCTURE AND SYSTEM
Banking System Meaning Key Characteristics
Small independent banks operating in a Localized, small-scale,
Unit Banking
limited area or single town independent, local focus
A network of branches spread across the Extensive network, centralized,
Branch Banking
country operated by commercial banks diverse services
Smaller banks deposit cash reserves with Inter-bank relationships, enhanced
Correspondent Banking larger banks to facilitate transactions in liquidity, facilitation of remote
areas without branches transactions
Multiple independently incorporated
Common control, independent
Group Banking banks under the control of a holding
operations, shared resources
company
Commercial banks providing only short-
Short-term finance, specialization,
Pure Banking term loans to industry, trade, and
prevalent in the U.K.
commerce
Banks perform both commercial and Dual function, diversified services,
Mixed Banking
investment banking functions prevalent in Germany
Promoting personal contact and
Personalized service, long-term
Relationship Banking continuous engagement with valuable
relationships, tailored solutions
customers
 BANKING STRUCTURE AND SYSTEM
Banking System Meaning Key Characteristics
Banks focus solely on collecting
Limited activities, focus on safety and
Narrow Banking deposits and investing in low-risk
liquidity, low credit risk
assets
Providing a broad range of financial
Comprehensive services, diversified
Universal Banking services from commercial and
activities, broad customer base
investment banking to insurance
Banks aimed at providing credit to Rural and semi-urban focus,
Regional Banking small borrowers in rural and semi- government and commercial bank
urban areas joint ownership
Privately owned banks operating in Private sector, local focus, rural and
Local Area Banks
rural and semi-urban centers semi-urban markets
Large corporate clients, high-value
Banking services targeted at large-
Wholesale Banking transactions, tailored corporate
sized customers and corporations
services
Wealthy individual clientele,
Banking services for wealthy
Private Banking personalized solutions, discreet
individuals
service
Banking services targeted at individual Individual customers, wide range of
Retail Banking
consumers products, extensive network
 BANKING SYSTEMS IN INDIA
• Branch Banking
• Regional Banking
• Local Area Banks
• Mixed Banking
• Retail Banking
• Wholesale Banking
• Private Banking
• Universal Banking
 TYPES OF BANKS
• Scheduled Banks
• Scheduled banks are those banks that are included in the Second Schedule of the Reserve
Bank of India (RBI) Act of 1934. These banks adhere to specific norms and regulations set
by the RBI and enjoy certain privileges and access to facilities from the central bank.
• Features:
• Eligibility for Loans: Scheduled banks are eligible to receive loans from the RBI at the bank
rate, which provides them with a reliable source of funds.
• Clearing House Membership: These banks automatically acquire membership in a clearing
house, facilitating efficient inter-bank transactions.
• Regulatory Criteria: To be included in the Second Schedule, a bank must meet the following
criteria:
• Paid-up Capital and Reserves: The combined paid-up capital and reserves should be at least INR 5
lakhs.
• Interest of Depositors: The bank’s operations must not be detrimental to the interests of depositors.
• Legal Status: The bank should be a company as per the Companies Act of 1956, a State Cooperative
Bank, a corporation, or any institution notified by the Government of India.
 TYPES OF BANKS
• Non-Scheduled Banks
• Non-scheduled banks are those banks that are not included in the Second
Schedule of the RBI Act of 1934. These banks do not meet the criteria to be
listed as scheduled banks.
• Features:
• Paid-up Capital: Their paid-up capital is less than INR 5 lakhs, which is a key
reason for their exclusion from the Second Schedule.
• Borrowing from RBI: Non-scheduled banks are not eligible to borrow funds
from the RBI for regular banking requirements, except in emergencies.
• Legal Status: While they can be legal entities, non-scheduled banks do not
enjoy the same procedural support from the government as scheduled banks.
TYPES OF BANKS
TYPES OF BANKS
 PUBLIC SECTOR BANKS
• State Bank of India (SBI) Group: The SBI and its associate banks form a significant part of
India’s banking sector. The SBI Group is renowned for its extensive network, which
includes branches in rural, semi-urban, urban, and metropolitan areas. It offers a wide
range of banking and financial services, including retail banking, corporate banking,
wealth management, and investment banking.
• Nationalised Banks: These banks were nationalized by the Government of India in
various phases, starting from 1969. The aim was to ensure a wider reach of banking
services across the country and to prioritize social welfare. They play a crucial role in
implementing government schemes and initiatives such as the Pradhan Mantri Jan Dhan
Yojana (PMJDY) and Mudra loans.
• Regional Rural Banks (RRBs): Established with the objective of serving rural areas, RRBs
focus on providing financial services to the agriculture sector and rural development. RRBs
are instrumental in providing credit to small and marginal farmers, artisans, and rural
entrepreneurs. They also help in the implementation of various rural development
programs and schemes.
 PRIVATE SECTOR BANKS
• Domestic Banks:
• Universal Banks: These banks provide a comprehensive range of banking services, including retail,
corporate, and investment banking. They cater to a broad customer base, from individuals to large
corporations.
• Differentiated Banks:
• Payment Banks: These banks focus on providing payment and remittance services. They are
restricted from lending activities and their primary objective is to enhance financial inclusion.
• Small Finance Banks: These banks aim to provide financial services to underserved and
unbanked segments, including micro and small businesses.
• Local Area Banks: These banks operate in specific regions and aim to promote financial
inclusion in their designated areas. They provide banking services to small businesses and
individuals in their locality, helping in regional economic development.

• Foreign Banks: Banks headquartered outside India but operating within the country. Examples include
Citibank, HSBC, and Standard Chartered Bank. These banks cater to both retail and corporate clients,
often specializing in international trade and investment services.
 CO-OPERATIVE BANKS
• Urban Co-operative Banks: These banks operate in urban and semi-urban areas, providing
banking services to their members, typically from a local community or a specific profession. They
offer services like savings and current accounts, fixed deposits, and loans for personal and
business purposes.
• Rural Co-operative Banks: These banks operate in rural areas and focus on providing agricultural
credit and supporting rural development. They include:
• State Co-operative Banks: These are apex co-operative banks at the state level, providing
financial support to the District Central Co-operative Banks and primary agricultural credit
societies.
• District Central Co-operative Banks: These banks operate at the district level, catering to the
needs of primary agricultural credit societies and rural clientele.
• Primary Agricultural Credit Societies (PACS): These are grassroots-level co-operative credit
institutions that provide short-term and medium-term credit to farmers for agricultural
purposes.
 CENTRAL BANK
• The Reserve Bank of India (RBI) is the central bank and the primary
regulator of the Indian banking system. It was established under the
Reserve Bank of India Act on April 1, 1935, and is headquartered in
Mumbai, the financial capital of India.
• Functions:
• Monetary Policy:
• Regulation and Supervision
• Currency Issuance
• Financial Stability
• Banker to the Government
• Foreign Exchange Management
 DEVELOPMENT BANKS
• Development banks provide long-term credit to support capital-intensive investments that
have long gestation periods and yield lower rates of return. They play a pivotal role in
financing industrial and infrastructure projects, as well as supporting small and medium
enterprises (SMEs).
• Role:
• Economic Development
• Support for SMEs
• Sector-Specific Funding
• Major Development Banks in India:
• Industrial Finance Corporation of India (IFCI)
• Industrial Development Bank of India (IDBI)
• Export-Import Bank of India (EXIM Bank)
• National Bank for Agriculture and Rural Development (NABARD)
• National Housing Bank (NHB)
 RIGHTS AND OBLIGATIONS OF BANKS

• In the world of finance, bankers play a crucial role as

guardians of money, providers of loans, and facilitators of
transactions. The relationship between a bank and its
customers is governed by a set of rules that ensure both
sides work honestly and fairly.
• These rules are about what banks can do (their rights) and
what they must do (their obligations).
 RIGHTS OF BANKERS

• Rights of General Lien

• Right of Set-off
• Banker’s Right of Appropriation
• Right to Charge Interest and Commission
• Right to Close the Account
• Right to Exercise Due Diligence
 OBLIGATIONS OF BANKERS

• Obligation to Honor Checks

• Obligation to Maintain Secrecy
• Obligation to Maintain Proper Records
• Obligation to Follow Customer’s Instructions
• Obligation to Give Notice before Closing the Account
• Obligation to Comply with Regulatory Requirements
 KYC NORMS

• KYC, or "Know Your Customer," is a fundamental process in the banking and financial
sector designed to verify the identity of clients. This process was introduced by the
Reserve Bank of India (RBI) in 2002 under the Banking Regulation Act of 1949, aiming
to prevent financial institutions from being exploited for money laundering, terrorist
financing, and other illicit activities.
• According to the KYC policy, a customer is defined as an individual or entity that
maintains an account or has a business relationship with the bank.
• In India, the eKYC process, or Electronic Know Your Customer, leverages Aadhaar
identity cards for digital verification of identity and address.
 KYC NORMS

• Necessity of Implementing KYC

• Prevention of Finance-Related Frauds
• Identification of Money Laundering and Harmful Activities
• Prevention of Benami Accounts
• Monitoring Large Value Transactions

• Objectives of KYC
• Verify Customer Identity
• Prevent Money Laundering
• Comply with Legal Requirements
 KYC NORMS
• Historical Context and Legal Framework
• Before 2002, Indian banks were advised to follow certain customer identification
procedures for opening accounts and monitoring transactions. The introduction of KYC
norms formalized these processes, making customer identification and transaction
monitoring mandatory. The PMLA, passed in 2002, aligns with FATF recommendations,
reinforcing the importance of KYC in combating financial crimes.
• RBI KYC Norms
• Since 2002, the RBI has mandated KYC norms for all new bank accounts, enforced from July 1,
2005. These norms aim to limit money laundering and terrorist financing by requiring:
• Public Notices
• Mandatory Identification
• Individual Notices
• Final Notices
 KYC NORMS
• KYC Processes and Procedures
• Customer Identification
• Proof of Identity
• Proof of Address
• Photographs
• Due Diligence
• Collecting Information
• Introduction Requirements
• Verification Methods
• Risk Categorization
• High-Risk Customers
• Medium-Risk Customers
• Low-Risk Customers
• Monitoring Transactions
 KYC NORMS
• Advantages of KYC
• Establishing Customer Identity
• Understanding Customer Activities
• Assessing Money Laundering Risks
• Protection from Losses and Frauds

• What is e-KYC?
• e-KYC involves electronic verification of customers' identity and address through Aadhaar
authentication. Customers must authorize UIDAI to release their details through biometric
authentication. Conditions for accounts opened via e-KYC include:
• Consent for OTP-Based Authentication
• Balance Limits
• Credit Limits
 CIBIL

• CIBIL, which stands for Credit Information Bureau (India) Limited, is one of the first credit
bureaus licensed by the Reserve Bank of India (RBI). It was established to collect and
maintain credit information on individuals and enterprises. By consolidating this
information, CIBIL helps in creating comprehensive credit reports and scores, which are
crucial for financial institutions in assessing the creditworthiness of their customers.
• A CIBIL score is a three-digit numeric summary of an individual’s credit history, ranging
from 300 to 900. The closer the score is to 900, the higher the creditworthiness of the
individual
• CIBIL scores are derived from the credit history found in the CIBIL report. This report
includes the borrower’s credit profile over the last 36 months. It encompasses various
types of loans such as home loans, credit cards, personal loans, automobile loans,
overdraft facilities, and their payment history.
 CIBIL

• CIBIL Report
• A CIBIL report is a detailed document that includes:
• CIBIL Score: The numeric summary of creditworthiness.
• Credit Summary: An overview of credit history.
• Personal Information: Name, date of birth, gender, and identification details.
• Contact Information: Addresses, phone numbers, and email.
• Employment Information: Occupation and income details.
• Loan Account Information: Details of loans and credit cards.
 CIBIL

• Importance of CIBIL Scores and Reports

• Creditworthiness Assessment
• Interest Rates
• Loan Eligibility
• Speedy Approvals
• Negotiating Power
• Building Financial Reputation
 CIBIL

• Functions of CIBIL
• Data Collection
• Credit Report Generation
• Score Calculation
• Credit Monitoring
• Risk Assessment
• Fraud Prevention
• Customer Empowerment
THANK YOU