SYSTEMS OF BANKING

A. GROUP BANKING AND CHAIN BANKING

1. GROUP BANKING

Group banking is a part of the USA banking system. It is a type of multiple banking consisting of
two or more banks under the control of a holding company which itself may or may not be a
bank. The term ‘bank holding company’ is based on 25% ownership or control of two or more
banks. The holding company is called the parent company and the banks under the parent
company are called operating companies.

According to the holding company banking system a group of banks are brought under
one centralized management and this management exerts control over all the units. Although
each bank has got a separate entity in itself its affairs are controlled by a holding company. it is
not uncommon for such a holding company to be affiliated with larger banks, in which case the
policies of the whole group are influenced by tat bank. This system of banking has been used
besides for the purpose of unifying the management for bringing into closer relations banking
corporation as their subsidiaries in certain cases.

ADVANTAGES/MERITS OF GROUP BANKING

The group banking system has certain advantages they are –

i) POOLING OF RESOURCES

The parent company pools the resources of the group and helps the group banks to provide
large loans and advances.

ii) DO NOT NEED LARGE CSH RESERVES

The banks in the group need not keep large cash reserves for they can transfer funds to each
other when the need arises.

iii) INCREASE IN EFFICIENCY

The efficiency of the group increases when the parent company provides such specialized
services as research, advice on investments, loans and legal matters to all the banks in the
group.

iv) ECONOMIES OF LARGE OPERATIONS

The group also gains from the economies of large scale banking operations. When the parent
company advertises makes bulk purchases and hires the services of experts on behalf of the
banks in the group.

v) NO MERGERS

As already noted above under the group banking system the operating companies do not merge
with the parent company and continue to keep their separate entities buy benefit from all the
advantages of a large scale organization.

vi) NO UNHEALTHY COMPETITION

Group banking avoids unhealthy competition among banks when they are less than one holding
company.

DISADVANTAGES/DEMERITS OF GROUP BANKING

Despite the above merits the group banking system suffers from certain disadvantages –

i) MONOPOLY BANKING

The group banking system is step towards monopoly banking which is not healthy from the
economic view point.

ii) INEFFICIENT SYSTEM

The operating banks may not follow the guidelines and policies laid down by the parent
company from time to time. This may lead to inefficiency.

iii) CHAIN REACTION

If the business of one member declines it may adversely affect the business of other members
of the group.

iv) DIVERSION OF FUNDS

If the parent company is not an operating banking company it may divert the funds of the group
in furthering its own interests. This may prove harmful for the entire operating group which may
be starved of funds and ultimately bring disaster to the group.

2. CHAIN BANKING

Chain Banking is also a USA banking system. It is a banking system where the same
individual or group of individuals and interlocking directorates controls two or more banks by
stock ownership as against control by a holding company under group banking. The main
difference between these system li9es in the fact that in the case of group banking the affairs of
the group are controlled by a holding company whereas in the cases of chain banking there is
no such intervention from any central organizations, i.e., stock holders directly or through their
nominees exercise control of competing banks.

The chain banking system possesses almost the same advantages and disadvantages as
that of group banking. The advantages arise from the economies of large scale operations,
centralization of resources, parallel management, etc. so the disadvantages may also be said to
arise from mismanagement and exploitation.

List of the Advantages of Chain Banking

1. It limits risks for a community, making it possible to expand local needs for
credit.
In 1921, before the creation of chain banks occurred in the United States, there were
over $1 billion in losses experienced by depositors within the unit-based banking
system. Many banks found themselves going out of business because the structures of
that system failed. By spreading out the risks between multiple small banks instead of
making every individual bank assume all risks, it became possible to offer more credit
or lending products to communities where it may not have been possible to do so
before.

2. This system makes it possible to access banking facilities when limited

resources are present.
When there is little financial capital available in a community, then the limited
resources restrict the number of banking facilities which can be supported. Some
small communities, before the creation of chain banks, may not have been able to
support a local bank at all. Because the nature of chain banking creates a centralized
structure where common management tendencies and risk handling are present, more
people can access banking facilities because more can be done with their limited
resources.

3. It provides an efficient system of management for better financial control.

Chain banking is more efficient than the unit-based model because there is one core
group of stakeholders who are organizing structures for multiple banks. It limits the
number of executive management decisions which must be made at the local level
because the stakeholders make the same decisions for multiple banks. Even when
chain banking involves multiple Boards or officers which serve with one another, the
similarities and cooperation involved in management create efficiencies for each
banking system. This creates better financial controls for everyone involved.

4. Chain banking systems rarely take on unnecessary risks.

The system of chain banking was created to avoid risks in the first place. It is a
structural response to the numerous losses that were experienced by depositors
leading up to, and then during, the period of the Great Depression. Instead of taking
risks with deposits in an effort to grow profits exponentially, the goal of this structure
is to manage funds in a way that makes them accessible and useful to individuals
without the same threats of loss. Although this process limits overall profitability, it
does provide a safer place for people to keep their money until they need to have it at
a later time.

5. It is an affordable system of banking.

Because there are fewer risks involved with chain banking from a consumer
standpoint, it becomes affordable to use banking tools and products. Individuals have
more access to credit, which allows them to start businesses, expand inventory, build
new structures, or even purchase a new home. The goal of chain banking is to create
as many efficiencies within the system as possible, which leads to better decisions on
how finances are managed at all levels within the organization.

6. Chain banking stops unhealthy competition.

Healthy competition occurs when 2+ organizations are competing for the same
customers by offering innovative or differential products at a price that is similar.
Unhealthy competition occurs when an organization is willing to undercut its profits
to gain a bigger market share. That action creates a race to the bottom for all
companies involved, as profits are slashed to maintain a market presence. By
instituting a system of chain banking, the unhealthy competition that can be seen in
some communities is much more difficult to implement.

7. It avoids the need for a merger.

When chain banking systems are implemented, the stakeholders do not merge their
operating companies with a parent company. The banks are still operated as if they are
an independent entity, even though they fall under the general control of parental
stakeholders. This gives each location the advantages of having a large-scale
organization, while keeping their separate entities and ability to provide localized
support.

8. Individual entities benefit from purchases of scale.

Because a common set of stakeholders is involved in the chain banking process, each
individual location gets to benefit from an economy of scale that they wouldn’t be
able to access without a parent company or stakeholder oversight. That creates lower
operational costs, which improves the bottom line of each location over time.
List of the Disadvantages of Chain Banking
1. It limits overall profitability.
Profits occur when risks are taken within the financial sector. Risks may also lead to
steep losses, which chain banking cannot afford to take. For that reason, banks
managed in this fashion often take a very conservative approach to investing. They
create small gains for their members or customers, with only small losses the potential
risk being faced. This creates an environment where the primary challenge is to have
the investment gains be greater than the rate of inflation, which does not always
happen.

2. There is little engagement regarding the social welfare needs of the

community.
Many banks use their profits in a way that betters the welfare needs of their local
communities. Because there are fewer profits available within the system of chain
banking, these institutions are rarely active in social improvement activities. Their
focus is to maintain the status quo, create profits where possible, and effectively
manage themselves in communities where there m ay be limited resource availability.

3. It creates a centralized structure where one person may control the wealth.
Many chain banking systems create a centralized structure where one entity, or even
one person, pulls the strings of wealth management for a series of banking locations.
Even if multiple banks are managed by multiple Boards or offices, the President or
central figure within the organization is often tasked with leadership decisions for it.
At the local level, that means the decisions made for all banks may not be the best
possible solution for a specific local bank.

4. Chain banking concentrates control of credit authorization.

The goal of chain banking is to expand opportunities for the average person to use
financial tools and lending products. When banks are controlled by a common set of
stakeholders, however, this structure also concentrates who is in control of credit line
authorizations. That makes it easier for stakeholders to discriminate against certain
groups of people if they desire to do so. Instead of being restrained by local interest
controls, stakeholders are only accountable to themselves and the profitability they are
able to achieve.

5. It creates a system which looks to create a monopoly.

Although the banks are technically independent within a chain banking system, they
are still controlled by the same group of stakeholders. That allows the stakeholders to
manage rates, products, and systems within the communities they control because
they are in control of bank access. When there is no competition available within a
community, then the consumers are at a disadvantage because they are forced to use
the banking tools that are available to them from the one association.

6. Chain reactions create declines for everyone.

The reason why chain banking tends to be a popular structure is that when one bank
creates gains, the others benefit through a chain reaction process. The gains filter
down to each satellite within the established chain. The opposite is also true, however,
which is why chain banking can be problematic. If one chain experiences dramatic
losses, then the other chains experience that loss as well.

7. There can be rebellion within the system.

In a chain banking system, a centralized core of leadership directs operations from
their parent location. These stakeholders may wish to see certain policies enacted at
the local level because it improves the bottom line of the banks. If local managers
disagree with these decisions, they may choose to not follow the policies or guidelines
that were outlined to them. Unless the stakeholders come to the individual location,
they may not realize their systems were not implemented. That process creates
inefficiencies within the system which may affect other locations as well.

These chain banking advantages and disadvantages show us that when resources are
limited, and risks could be devastating, it is a feasible solution which brings financial
tools to small communities. It may also limit the amount of profits available within
the community, while focusing on the preferences of a few to manage the needs of the
many.

B. UNIT BANKING AND BRANCH BANKING

1. UNIT BANKING

Unit banks are independent one office banks. Their operations are confined in general to a
single office. The existence of unit banking is found in countries like USA, England, Canada,
Australia, India, etc. the existence of unit banking prevent the growth of monopoly in banking.
Some unit banks have grown to large sizes but they operate under severe restrictions which
limit or prohibit the establishment of branches.

The unit banks operate in small towns and cities and are called country banks and city
banks respectively. All unit banks are linked together by a correspondent bank relationship. A
country bank has deposits in branch banks in the city banks and city banks have deposits in
branch banks in the same and other big cities like New York and Chicago.

MERITS OF UNIT BANKING

 The unit banks being independent and one office banks, possess certain advantages –

i) EFFICIENT WORKING

A unit bank works very efficiently and provides prompt service to its customers for like a
departmental stare in a locality it has competitors in other unit banks.

ii) PERSONAL RELATIONS

Since its organizers and other staff are generally local people they have personal relations which
help in mobilizing larger resources for the bank.

iii) QUICK DECISIONS

They are able to meet the financial requirements of the people promptly and efficiently. There
is always on the spot decision making by the bank management.

iv) LESS IRREGULARITIES

There are fewer chances of fraud and irregularities under the unit balking because of the close
supervision and control of the management.

v) LOCAL UTILISATION OF DEPOSITS

Local deposits are utilized by a unit bank on the development of the same locality and they are
not to be transferred to other towns as is done under branch banking.

vi) ECONOMIES

The unit banking operations being on a small scale they are free from the diseconomies which
arise in large scale banking operations.

vii) ]PREVENTION OF MONOPOLY

Unit banking helps in the prevention of monopoly banking.

viii) ENJOY MERITS OF BRANCH BANKING

The unit banks also enjoy the advantages of branch banking as they are connected with big
banks through correspondent banking system in the USA.

DEMERITS OF UNIT BANKING

Despite these merits the unit banking system suffers from certain disadvantages

i) FAILURE TO SPRED RISKS

The unit banking system suffers from its failure to spread risks. As the unit banking operations
are localized in a particular area the failure of a big party to repay the loan in time may bring
disaster to the bank.

ii) LIMITED RESOURCES

Unit bank has another disadvantage that it has limited resources at its disposal. So in the event
of a financial or economical crisis if tits depositors start withdrawing their money the bank fails.
This is what actually happened in the USA during the Depression of 1930 when 5000 banks
failed and an additional 1200 were absorbed by larger banks.

iii) NON DIVERSIFIED SERVICES

The unit bank cannot provide diversified banking services to its customers because of its
inability to establish branches and higher casts. For example, businessman may prefer a branch
of their city bank in the local business to facilitate their business transitions.

iv) NO ECONOMIES OF LARGE OPOERATIONS

The unit banking system cannot have the advantages of large scale banking in that it cannot
recruit more efficient and highly paid staff and intensive specialization and division of labor.

v) LACK OF FUND MOBILITY

An important argument against the unit banking system is that there is lack of mobility of funds
within the country. The unit banks do not attract funds from outside their areas. On the other
hand there is every likelihood of local funds flowing out to the large money markets in pursuit of
higher interest ratio. This is because the unit banks are unable to pay high interest rates.

vi) NON ECONOMIC CONSIDERATIONS

A unit bank may not advance loans strictly on economic considerations thereby jeopardizing to
give loans to a few local businessmen who may not be creditworthy.

vii) BACKWARD AREAS

Since a unit bank has limited resources at its disposal it cannot be opened in backward towns.
As a result such areas continue to remain backward.

viii) UNHEALTHY COMPETITION

As every company starts a unit bank in a large town it leads to unhealthy competition among
different unit banks with the result that very few survive in the long run.
 ix) REMITTANCE OF FUNDS

As a unit bank has no branches at other towns it has to depend upon the correspondent banks
for remittance of funds. This is very expensive.

2. BRANCH BANKING

Branch banking is the most prevalent banking system in the majority of countries. under
this system a big bank has a number of branches in different parts of the country and even
many branches within a cosmopolitan city like Mumbai, Kolkata, Chennai, New Delhi.

Small commercial banks also carry on branch banking operations within a state or
region. In the USA branch banking is confined to the states. Accordingly a number of banks have
merged under a holding company to carry on branch banking business efficiently and profitably.

MERITS OF BRANCH BANKING

The branch banking system has many advantages which makes this system superior to
the Unit Banking System

i) SPREADING OF RISKS

The branch banking has the advantage of spreading risks geographically and industrially. If
branches in a particular area suffer losses due to recession n industries located there, these
losses can be offset by profits from prosperous areas.

ii) LARGE SCALE ORGANISATION

The branch banking system has the advantages of large scale organization because a large bank
is able to recruit efficient and trained staff and pay better than the unit banks. It can thus realize
the advantages of intensive specialization and division of labor by carrying out separate banking
operations under different staff.

iii) ECONOMY IN RESERVES

The branch banking system helps in economizing the use of cash reserves. It can move cash
reserves from one branch where they are less needed to the others where they are more
required in times of necessity.

iv) ADVANCES ON MERITS

Under this system loans are advanced on merits than on personal or local considerations. There
are set of rules under which loans are advanced to customers.
 v) DIVERSIFICATION OF OPERATIONS

Under the branch banking system there is diversification of banking operations. By banks can
provide banking facilities to trade, industry, businessmen and the common man at cheaper
rates and more efficiently than unit banks because they possess large financial resources.

vi) EQUITABLE DISTRIBUTION OF FUNDS

As a corollary to the above big banks can provide banking facilities throughout the length and
breadth of the country whether it is a small village or a big city and a backward or a prosperous
area. It is in this way that branch banking also helps in the equitable distribution of funds within
the country.

vii) PROPER UTILIZATION OF FUNDS

A big book with large number of bank branches is able to utilize its funds most profitably. Lot
can carry out its banking operations with lower cash reserves in each branch and lend the
remaining amount to its customers. In case the need arises for excess cash in one branch it can
be met by transferring funds from some other branch.

Thus the commercial banks earn large profits under branch banking than under unit
banking.

viii) REMITTANCE FACILITIES

With its network of branches spread n all parts of the country a big bank can provide cheaper
and better remittance facilities to its clients than under the unit banking system having
correspondent banking relations.

ix) LARGE INVESTMENTS

Under the branch banking system a big bank with large financial resources is in a better position
to choose securities and make large investment in keeping with the principles of safety and
liquidity.

x) EFFECTIVE CENTRAL BANK CONTROL

The central bank of the country can control the banks more effectively under the branch
banking system than under the unit banking it is easier to control the credit policies of a few
large banks than those of numerous nit banks.

DEMERITS OF BRANCH BANKING

 The branch banking has its critics who point towards a number of disadvantages of this
system. They are discussed as under –

i) BUREAUCRATISATION

`under the branch banking system there is bureaucratization and the management of all the
branches is under the control of the head office and this leads to delay in taking prompt
decisions by the branch managers. They have to refer all cases above a certain limit for
advances to the head office.

ii) DO NOT EET LOCAL NEEDS

The branch managers are not able to meet the borrowing needs of the local business
community as efficiently and sympathetically as the unit banks. This is because the branch
bank managers stay in one locality only temporarily and have to operate under rules set by
the head office.

iii) MONOPOLY BANKING

The branch banking system leads to the establishment of monopoly banking in the country.
When a few big banks open branches in all parts of the country they limit competition in
banking and ultimately lead to the establishment of monopoly in the banking industry.

Funds tend to concentrate in a few banks. It may further lead to concentration of

economic power in industry and even to political power by such financially powerful banks.

iv) LAX SUPERVISION

As big bank has a number of branches spread throughout the country it is difficult to
manage and supervise them efficiently. Control becomes lax, the banking services suffer and
the clients are hit hard.

v) TRANSFER OF FUNDS

Another disadvantage of branch banking s that deposits of one area may be used for
financing business and industry in other areas where the banks except to earn more by
lending. This may adversely affect the farmer area if it is already backward.

vi) ]FEAR OF LOSS

If branch banking spreads on a large scale some of the branches may run under losses due
to bad debts and low mobilization may run under losses due to bad debts and low
 mobilization of deposits. Such a situation may lead to huge loss to the bank thereby leading
to its failure.

vii) UNHEALTHY COMPETITION

Branch banking leads to competition among different banks in establishing branches at

various places. This tendency leads to unnecessary increase in expenses. The usual practice
is for the different commercial banks to open branches in the same locality in big towns and
cities.

This leads to concentration of branches, thereby resulting in unhealthy competition and

rivalry. Sometimes the banks give inducements in the form of gifts and provide free
outstation services to attract customers. Such device increase bank expenses and lead to
wastage of national resources.

CONCLUSION

Despite demerits the branch banking system is preferred to the unit baking in
developing countries like India. In poor countries the unit banking cannot be successful.
There is need to develop agriculture, industry and trade which is only possible through
branch banking system with its large financial resources.

Further for a balanced regional development it is through branch banking the funds can
be utilized from branches in developed regions to backward regions.

However the disadvantage of the branch banking can be avoided through their proper
regulation by the central bank of the country. If the banks fail to follow the central bank they
can be nationalized by the government. This is what has been done in India and a few other
developing countries.

MECHANISMS OF CREDIT CREATION

A central bank is the primary source of money supply in an economy through circulation
of currency. It ensures the availability of currency for meeting the transaction needs of an
economy and facilitating various economic activities such as production, distribution and
consumption. However, for this purpose the Central Bank needs to depend upon the reserves of
commercial banks. These reserves of commercial banks are the secondary source of money
supply in an economy.

Creation of credit is one of the most important functions of a modern commercial bank.
Therefore, money supplied by the commercial banks is called credit money. Credit creation
refers to expanding the availability of money through the advancement
of loans and credit by banks and financial institutions. These institutions
use their demand deposits to provide loans to their customers, giving
borrowers higher purchasing power and competitive interest rates. The
term ‘credit creation’ according to Benham implies a situation when ‘a bank may receive
interest simply by permitting customers to overdraw their accounts or by purchasing securities
and paying for them with its own cheques, thus increasing the total bank deposits.’

Commercial banks create credit by advancing loans and purchasing securities. They lend
money to individuals and businesses out of deposits for lending purposes. They are required to
keep a certain amount as reserve with the central bank for serving the cash requirements of
depositors. After keeping the required amount of reserves, commercial banks can lend the
remaining portion of public deposits. The giving of loans by the banks in the form of derivative
deposits leads to the creation of money.

Illustration

Example

Let’s assume that the LRR (Legal Reserve Requirement) or Reserve Ratio is 20%.
 ‘A’ deposits ₹1,000 with the bank. The money deposited by ‘A’ will be the
Initial Deposit. This means that the bank can keep only  ₹200 (20% of
₹2000) as cash reserve and can lend the remaining ₹800. 
 In case the bank lends ₹800 to a borrower ‘B’, the amount will not be given
in the form of cash. Instead, the bank will open an account under the name of
‘B’ and the amount will be credited to his account. The money spent by ‘B’
comes back into the bank in the form of deposit accounts of those who have
received this payment. This will increase the demand deposit of banks by
₹800.
 With the new deposit, the bank keeps 20% of ₹800 (i.e., ₹160) as cash
revenue and lends the remaining ₹640 to another borrower ‘C’, which again
comes back to the bank as a deposit when ‘C’ spends the money. This time,
the demand deposit of the bank increases by ₹640.
 Further with the new deposit, the bank keeps 20% of ₹640 (i.e., ₹128) as
cash reserve, and lends the remaining ₹512 to borrower ‘D’, which again
comes back to the bank as a deposit when ‘D’ spends the money. This time the
demand deposit of the bank increases by ₹512.
 This process of deposit creation continues till the total cash reserves become
equal to the initial deposit i.e., ₹1,000.
The initial reserves of ₹800 led to the credit creation of ₹4,000, and the initial deposits
of ₹1,000 with the bank led to the creation of total primary deposits of ₹5,000. 
It means that the total deposits in the bank has become five times of the initial deposit,
which is the  Money Multiplier.  Therefore, CC enhances banking business.
ESSENTIAL CONDITIONS FOR CREDIT CREATION
1. Public depositing cash into commercial banks

2. The eagerness of commercial banks to lend cash to people or

organizations as credit.

3. The eagerness of people or organizations in looking for cash from

commercial banks as credit.

IMPORTANT ASPECTS OF CREDIT CREATION

The two important aspects of credit creation are –

i) LIQUIDITY – the bank must pay cash to its depositors when they exercise their right
to demand cash against their deposits.
ii) PROFITABILITY – banks are profit driven enterprises. Therefore, a bank must grant
loans in a manner which earns higher interest than what it pays on its deposits.
The bank’s credit creation process is based on the assumption that during any
time interval; only a fraction of its customer genuinely needs cash. Also the bank
 assumes that all its customers would not turn up demanding cash against their
deposits at one point in time.

Basic concepts of credit creation –

i) BANK AS A BUSINESS INSTUTION – bank is a business institution which

tries to maximize profits through loans and advances from the deposits.
ii) BANK DEPOSITS – bank deposits form the basis for credit creation and
are of two types -
a. PRIMARY DEPOSITS

A bank accepts cash from the customer and opens a deposit ion his name. This is a primary
deposit. These deposits are the basis of credit creation.

b. SECONDARY DEPOSITS

A bank grants loans and advances instead of giving cash to the borrower, opens a deposit
account in his name. This is the secondary or derivative deposit. Every loan creates a deposit.
The creation of a derivative deposit means the creation of credit creation.

iii) CASH RESERVE RATIO (CRR)

Banks know that all deposits will not withdraw all deposits at the same time. Therefore, they
keep a fraction of the total deposits for meeting the cash demand of the depositors and lend
the remaining excess deposits. CRR is the percentage of total deposits which the banks must
hold in cash reserves for meeting the depositors demand for cash.

iv) EXCESS RESERVES

The reserves over and above the cash reserves are the excess reserves. These reserves are
used for loans and credit creation.

v) CREDIT MULTIPLIER

Given a certain amount of cash a bank can create multiple times credit. In the process of
multiple credit creation the total amount of derivative deposits that a bank crates is a multiple
of the initial cash reserves.

METHODS OF CREDIT CREATION

i) CEATION OF CREDIT BASING ON PRIMARY OR PASSIVE DEPOSITS

The bank merely accepts the cash brought by the customers and deposits them in his account.
It is primary deposit. In this case the role of the bank is merely passive. The primary deposits
do not make any net addition to the stock of money in the economy. Generally, the deposits
are withdrawn by the depositors in piecemeal. So the bank after keeping a small percentage
of these deposits in cash uses the balance for making loans and advances to the customers.

ii) CREATION OF CREDIT BASING ON DERIVATIVE OR ACTIVE DEPOSITS

The derivative deposits are created by the bank in a more active manner by opening a deposit
account in the name of the person who comes to the bank to borrow funds from it. Since the
bank plays an active role in the creation of cash deposits they are known as active deposits.

The creation of the derivative deposits can be explained with the help of an example.
Let us suppose that the bank grants a loan of Rs. 1,00,000 to its customer against some
collateral security. What the bank actually does is that it opens an account in the name of the
borrower and credits Rs. 1,00,000 to the borrower in cash. The borrower may either withdraw
the entire amount at once or he may withdraw small amounts of money from time to time
according to the requirements. Thus by making a loan according to his requirements. Thus
every loan creates a deposit. It should be noted that such actively created deposits lead to a
net increase in the total supply of the money in the economy. But the primary deposits make
no net addition to the total stock of money. The active deposits are also created by the bank
when it purchases securities or other forms of assets from the public.

iii) MULTIPLE CREATION OF CREDIT

The actual process of multiple creation of credit may be explained with the following example.
Let us suppose that the minimum cash reserve ratio observed by the commercial banks is
10%. Let us suppose that a person deposits Rs 1, 00,000 in the bank A. the bank A keeps
Rs.1,00,000 in cash and grants loan by the bank of the balance amount. The loan money is
credited to his deposit account. Suppose the borrower pays to his creditor in connection with
some business transaction a cheque drew his account with the bank.

The other Bank B now receives the primary deposit of Rs. 90,000 in the form of a
cheque drawn upon the first Bank A. after keeping 10% of cash ratio, i.e., Rs 9000 the second
bank may create another derivative deposit by giving loan of Rs 81,000 to some borrower. The
second borrower may make the payment out of his accounts to another creditor who happens
to have a deposit account with the third bank C. the third bank will now receive the primary
deposit of Rs 81,000 in the form of cheque drawn on the second bank. This process may be
repeated until the total volume of derivative deposits created by all the banks would be a
multiple of the initial amount created by the first bank.

The credit multiplier may be defined as the ratio between the ultimate amount of
derivative deposits created and the original amount of excess reserves in the banking system.
The credit multiplier is arrived at by dividing the total volume of derivative deposits by the
original excess reserves.

Credit Multiplier = the volume of derivative deposi00ts

Original excess reserves

It should be remembered that the size of the credit multiplier depends upon the size of the
cash reserve ratio. If the cash reserve ratio is low the credit multiplier will be high if the cash
reserve ratio is high then the credit multiplier will be low.

Advantages

The advantages of credit creation for an economy are similar to

money being available to people as a medium of exchange. Thus,
these include, 

1. Enable efficient monetary policy

2. Stabilize the economy along with a mandatory reserve system
3. Mitigates inflation 
4. Makes credit available to poorer sections of society, leading to
inclusive growth. 
5. Wider access to consumer goods and investment
opportunities.
LIMITATIONS ON THE POWER OF THE BANKS TO CREATE CREDIT

The banks cannot go on expanding credit indefinitely. The power of the banker to
create credit is limited by the following factors:

i) SIZE OF CASH

The commercial banks can create credit only on the basis of cash received from the public in
the form of primary deposits. If the primary deposits are large then the derivative deposits
crated on their basis will also be large.

ii) CASH RESERVE RATIO

Credit Creation is the reciprocal of the cash reserve ratio. Higher the cash reserve ratio the
smaller will be the volume of excess reserves available and smaller would be the volume of
credit creation by the banks.
 iii) EXTERNAL DRAIN

The term external drain refers to the cash withdrawn by the borrowers. With the withdrawal
of cash the excess reserves of the banks are automatically reduced. This reduces their power
to credit creation.

iv) BANKING HABITS OF THE PEOPLE

If the people conduct most of their business transactions in cash rather than through cheques
then multiple credit creation will be rather limited.

v) BANK’S RESERVE WITH THE CENTRAL BANK

The central bank keeps on changing the percentage of banks reserves from time to time.
When the central bank increases the percentage of these reserves the power of the
commercial banks to create credit is reduced in the same proportion.

vi) MONETARY POLICY OF THE CENTRAL BANK

The central bank has powerful weapons like the bank rate and the open market operations
with the help of which it can exercise control on the expansion and contraction of credit by
the commercial banks.

vii) SUPPLY OF GOOD COLLATERAL SECURITIES

Every loan made by the bank is backed up by some valuable security like stocks, shares, bills
and bonds, etc. if these collateral securities are not available in sufficient number the banks
cannot expand their lending activities.

viii) CONDITIONS OF TRADE AND BUSINESS

During a period of prosperity there will be greater demand for bank loans on the part of
business. The banks will be able to create a greater volume of credit at such a time.

Joint stock Banking

The Indian joint stock banks form an important constituent of the Indian financial
system. A joint stock bank may be defined as any company which accepts for the purpose of
lending or investment deposits of money from the public, repayable on demand or
otherwise and withdraw able by cheque, draft, order or otherwise. The joint stock banks are
classified by the o of India (RBI) as scheduled banks and non scheduled banks. Scheduled
banks are those banks which are listed in the second schedule of the RBI Act, 1984. These
banks comprise commercial banks, regional rural banks, urban cooperative banks and state
 cooperative banks. It may be noted here that all scheduled banks are not Indian joint stock
banks. Those banks which are registered under the Indian Companies Act and which are
listed in the Second Schedule of the RBI Act come under the category of Indian Scheduled
joint stock banks. Further in terms of Section 22 of the Banking Regulation Act, 1949, no
company shall carry on banking business unless holds a license granted by the RBI in such
behalf.

Like the commercial banks of other countries, Indian Joint stock banks mainly accept
deposits and lend money. In addition they perform various agency services and general,
utility services. These include among others payment of subscription, premium, etc
collection of cheques, bills, etc. acceptance of bills of exchange, issue of credit instrument
acting as refers as to the respectability and financial standing of the customers acceptance
of valuables for safe custody, etc.

The joint stock banks have adopted several initiatives to strengthen their business
practices including among others greater product sophistication increased customer
orientation improved risk management particularly credit risk management techniques
updated management information systems, greater focus on electronic banking channels
and diversification into newer business areas

ASSET STRUCTURE OF THE INDIAN JOINT STOCK BANKS

The asset of an Indian Joint Stock banks mainly comprises-

i) Cash in hand
ii) Balances with banks and loans at call and short notice
iii) Bills purchased and discounted
iv) Investments
v) Loans and advances

FOREIGN EXCHANGE (SYSTEM) (FOREX)

Foreign exchange, or forex, is trading one currency for values equivalent

to another currency. The trading occurs between currency pairs. The
foreign exchange rate fluctuates often and the supply and demand
factors in the market determines it. The platform where this exchange
occurs is the foreign exchange market.
Foreign exchange is the activity of conversion of currencies by means
of an exchange rate. The foreign exchange market is vast and open
throughout the day. Trading takes place over the counter (OTC), and
banks and financial institutions jointly oversee the market. There is
always an exchange of goods and services across borders, which helps
facilitate international trade between countries. Transactions in the
foreign exchange market provide a mechanism for transferring
purchasing power from one currency to another. Like any other
market, the currency prices depend on the supply and demand of
sellers and purchasers. However, there are other forces that influence
these rates. Interest rates, central bank policies, economic growth rate,
inflation, and the country’s geopolitical situation can all influence
currency demand.
Transactions with foreigners takes place through national currencies.
However, external transactions takes place by means of a common
currency. Such a currency should be an economically dominant one.
Examples include U.S. dollars, Euros, British pounds, and Japanese yen.
The balance of payment account keeps track of the country’s external
trade. Receipts are credited to it, and payments are debited from it.
Depending upon whether the foreign currency receipts are more or
less than the payments, the account balance becomes negative or
positive. Assuming other things are constant, it is clear that if a
country has a balance of payment deficit, it has a weak national
currency. Deficit balance of payment results in increased demand for
foreign currencies. Therefore, countries keep foreign exchange
reserves to accommodate changes in these rates and save the value
of their currencies if they depreciate.
Example

The following example is provided to give readers a basic

understanding:
Let us take the example of David. David is visiting a new country in
Europe. He is there as a tourist. He cannot spend his dollars in a
foreign country as an American. It is the case for every foreign
national. If the individual visits a foreign country, they have to make
transactions in its currency. Here, the currencies involved are the Euro
and the U.S. dollar. Suppose the exchange rate prevailing is 1.2 dollars
for 1 euro. David has to spend 12 dollars to purchase an item worth 10
Euros. Suppose the dollar value against the Euro increases, and it is 2
dollars to get one Euro. David has to spend 20 dollars to purchase 10
Euros worth of items. Here, the dollar’s value is less than the Euro,
which means the dollar’s value depreciates in comparison.

Trading in Foreign Exchange

There are several ways in which trade occurs in the forex markets. The
categories of markets involve:

 The spot market: The exchange rates here are in real-time and
settled within two days.
 Forward market: The parties involved here agree to settle the
amount in the future on a specified date.
 Futures market: The foreign exchange currency trade at a future
date and at a predetermined amount. They undergo public
trading, unlike the forward market.
Cooperative bank

A co-operative bank is a financial entity which belongs to its members, who are
at the same time the owners and the customers of their bank. It is often
established by people belonging to the same local or professional community
having a common interest. It is formed to promote the upliftment of financially
weaker sections of the society and to protect them from the clutches of money
lenders who provide loans at an unreasonably high-interest rate to the needy.
The co-operative structure is designed on the principles of cooperation, mutual
help, democratic decision making and open membership. It follows the principle
of ‘one shareholder, one vote’ and ‘no profit, no loss’.
Cooperatives Banks are registered under the Cooperative Societies Act, 1912.
These are regulated by the Reserve Bank of India and National Bank for
Agriculture and Rural Development (NABARD) under the Banking Regulation
Act, 1949 and Banking Laws (Application to Cooperative Societies) Act, 1965.

Cooperative banks differ from commercial banks on the grounds of organisation,

governance, interest rates, the scope of functioning, objectives and values.

Cooperative banking is a type of banking service that is provided by a

cooperative, which is a financial institution that is owned and controlled by its
members. Cooperative banks are founded by collecting funds through shares,
accepting deposits and granting loans.

Cooperative banking services are typically focused on providing credit and

other banking services to members of the cooperative. 

Cooperative banking services may include savings accounts, checking

accounts, loans, mortgages, insurance, and investment services. In addition,
cooperative banks may offer a variety of services aimed at helping members
of the cooperative with their financial needs, such as financial education and
money management programs.

According to Section 56(cci) of the BR Act, a “co-operative bank” means a

state co-operative bank, a central co-operative bank and a primary co-
operative bank.

Characteristics of Cooperative Bank

Some of the main features or characteristics of cooperative banks are:

Customer-owned entities
The members of cooperative banks are both the owners and the customers of
the bank. Thus, the aim of the cooperative bank is not to maximize profits but
to provide the best possible services to its members. Some of the cooperative
banks also admit non-members so as to provide them with banking services.

Democratic member control

Cooperative banks are owned and controlled by members, who
democratically elect the board of directors. The basic principle of co-
operatives “one man one vote” is followed, irrespective of the number of
shares held by a member, which ensures that no member enjoys any
arbitrary power over other members.

Profit allocation

A specified portion of the profits are transferred to Statutory Reserve and

other reserves, and then a fair rate of interest is paid on the capital
subscribed by the members. A part of this profit can also be distributed to
the co-operative members, with legal and statutory limitations in most
cases.

Inclusion of rural masses

It plays a significant role in the financial inclusion of unbanked rural masses.

Functions of Cooperative Banks

 It provides financial assistance to people with small means and

protects them from the latches of money lenders providing loans
and other services at a higher rate at the expense of the needy.
 It supervises and guides affiliated societies.
 Rural financing- It provides financing to rural sectors like cattle
farming, crop farming, hatching, etc. at comparatively lower rates.
 Urban financing- it provides financing for small scale industries,
personal finance, home finance, etc.
 It mobilises funds from its members and provides interest on the
invested capital.

Objectives of Cooperative Banks

 To provide rural financing and micro-financing.

 To remove the dominance of money lenders and middleman.
  To provide credit services to agriculturalists and weaker sections of
the society at comparatively lower rates.
 To provide financial support and personal financial services to small
scale industries, housing financial assistance, etc.
 To provide basic banking services to its members.
To promote the overall development of rural areas.
Cooperative banks play an integral part in the implementation of
development plans and are important for the effective functioning of the
banking system in India.

DEFINITION of BANKER

According to Halbury’s Law of England “A banker is an individual, partnership or

corporation whose sole or predominating business is banking, i.e., receipt of money on current
or deposit account and the payment of cheques drawn by and the collection of cheques paid in
by a customer.”

Dr. H.L. Hart states “A banker or a bank is a person or a company carrying on the
business of receiving moneys and collecting drafts for customers subject to the obligation of
honoring cheques drawn upon them from time to time by the customers to the extent of the
amounts available on their current accounts.”

According to Section 2 of the Bill of Exchange Act, 1882, “Banker is a person or a body of
persons incorporated or not carrying on the business of banking.”

Section 3 of the NI Act, 1881, “Banker includes any person acting as a banker and any
post office saving bank.”

Section 5 (1) of the Banking Regulations Act, 1949 a banking company is defined as “any
company which transacts the business of banking. Under section 5 (1) (b) banking means the
accepting for the purpose of lending or investment of deposits of money from the public
repayable on demand or otherwise and withdrew able by cheque, draft, order or otherwise.”

To sum up a banker is who –

i) Take deposit account

ii) Take current account
iii) Issue and pay cheques
iv) Collect cheques

DEFINITION OF CUSTOMER
 According to H.L. Hart “a customer is one who has an account with a banker or for whom a
banker habitually undertakes to act as such.”

In view of the judicial pronouncement laid down in GREAT WESTERN RAILWAY COMPANY V.
LONDON AND COUNTY BANKING COMPANY, a customer was defined as a person who has some sort of
an account either deposit or current account or some similar relation with a banker.

The word customer was explained in the case of COMMISIONERS OF TAXATION V. ENGLISH,
SCOTTISH AND AUSTRALIAN BANK LTD., the judge observed that customer signifies a relationship in
which duration is not of essence. A person whose money has been accepted by the bank on the footing
that they undertake to honor cheques up to the amount standing to his credit is a customer of the bank
in the sense of the statute irrespective of whether his connection is of long or short standing. The
contrast is not between a habitual and a new comer but between a person for whom the bank performs
a casual service, e.g., cashing a cheque for a person introduced by one of their customers and a person
who has an account of his own at the bank.

In order to consider any person as a customer he must satisfy the following conditions –

i) He must have some sort of account, i.e., deposit, savings or current account.
ii) Even a single transaction may constitute him to be a customer.
iii) Frequency of transactions is anticipated but not insisted upon
iv) The dealing must be of a banking nature.

REALTIONSHIP BETWEEN BANKER & CUSTOMER

1. RELATIONSHIP OF DEBTOR AND CREDITOR

When a customer opens an account with a bank and if the account has a credit balance then the
relationship is that of debtor (banker/ bank) and creditor (customer).

In case of savings/ fixed/ current account the banker is the debtor and the customer is the
creditor. This is because the banker owes money to the customer. The customer has the right to demand
back his money whenever he wants it form the baker and the banker must repay the balance to the
customer.

In case of loan or advance accounts, banker is the creditor and the customer is the debtor
because the customer owes money to the banker. The banker can demand the repayment of loan/
advance on the due date and the customer has to repay the debt.

A customer remains a creditor until there is credit balance in his account with the banker. A
customer (creditor) does not get any charge over the assets of the banker (debtor). The customers status
is that of an unsecured creditor of the banker.

1. RELATIONSHIP OF TRUSTEE AND BENEFICIARY

Section 3 of the Trust Act 1882 defines the tern “trustee” as one to whom property is entrusted to be
administered for the benefit of another. Section 3 of the Specific relief act, 1963 states that “trustee
includes every person holding, expressly, by implication or constructively a fiduciary character.”

A trustee holds property for the beneficiary and the profit earned from this property belongs to the
beneficiary. For instance, if the customer deposits securities or valuables with the banker for safe
custody, banker becomes a trustee of his customer. The customer is the beneficiary so the ownership
remains with the customer.

1. RELATIONSHIP OF BAILOR AND BAILEE

The relationship between the banker and the customer can be that of Baylor and Bailee. According to
Section 148 of the Indian Contract Act, 1872 bailment refers to delivery of goods by one person to
another for some purpose under the condition that the goods to be returned to depositor when the
purpose is accomplished or otherwise disposed of according to the directions of the person while
delivering the goods. bailer is the party that delivers property to another. Bailee is the party to whom the
property is delivered.

So when a customer gives a sealed box to the bank for safe keeping the customer became the
bailer and the bank became the bailee. The bank as a bailee is liable to keep those in safe custody as a
custodian on specified charges. It is also liable to compensate any loss to the property under its custody.

10. RELATIONSHIP OF ADVISOR AND CLIENT

When a customer invests in securities the banker acts as an advisor. The advice can be given officially or
unofficially. While giving advice the banker has to take maximum care and caution. Here the banker is an
advisor and the customer is a client.

1. RELATIONSHIP OF ASSIGNER AND ASSIGNEE

An assignor is a person who transfers his security rights to a lender as collateral to the money borrowed
by him. The transfer of Life Insurance Policies, National Saving Certificates, Supply bills, etc. in the name
of the bank is examples of assignment. The bank on whose name security rights are transferred by the
assignor is called as assignee. On full payment of dues to the assignee the assignor can get the security
reassigned in his name.

2. OTHER RELATIONSHIPS

Other miscellaneous banker – customer relationships are as follows:

i) OBLIGATION TO HONOUR CHEQUES

As long as there is sufficient balance in the account of the customer the banker must honor all his
cheques. The cheques must be complete and in proper order. They must be presented within six months
from the date of issue.
 ii) SECRECY OF CUSTOMER’S ACCOUNT

When a customer opens an account in a bank the banker must not give information about the
customer’s account to others.

iii) BANKER’S RIGHT TO CLAIM INCIDENTAL CHARGES

A banker has a right to charge a commission, interest or other charges for the various services given by
him to the customer. For e.g., an overdraft facility.

iv) LAW OF LIMITATION ON BANK DEPOSITS

Under the law of limitation, generally a customer gives up the right to recover the amount due at a
banker if he has not operated his account since last 10 years.

CONCLUSION

These are some of the relationship between the banker and a customer. The said relationship
can be called a fiduciary relationship, i.e., based on good faith between the two.

Rights of the Customer

1. Right to grievance redressal and compensation

The customer has the right to a grievance redressal system if the

bank fails to adhere to its basic norms. If the complaint isn’t
resolved by the bank, the customer can go to the banking
ombudsman.

2. Right to privacy

The bank is obliged to respect the privacy of the customer by

keeping the personal information of the customer confidential.
Bankers can only disclose such information in matters of law or with
the permission of the customer.

3. Right to the suitability

Under this right, the banks should always sell the products by
taking into consideration the needs of the customer.
4. Right of transparent, fair and honest dealing

The contract between the bank and the customer should be easily
understood by the common man. The bank should make the
customer aware of the major aspects like interest rates and risk
involved etc. It is the responsibility of the bank not to hide anything
from the customer before signing the agreement.

5. Right to fair treatment

The customers have the right to not be discriminated against based

on caste, creed, gender, sex, religion, etc. by the bank. But, the
bank can offer schemes which are designated for a particular set of
people.

In LADBROKE V. TODD, according to the judge the relation of banker and customer begins as soon as
the first cheque is paid in and accepted for collection. It is not necessary that the person should have
drawn on any money or even that he should be in a position to draw any money.

COLLECTING AND PAYING BANKER

Define collecting banker-

One who undertakes to collect cheques, drafts, bill, pay order, traveller cheque,
letter of credit, dividend, debenture interest, etc., on behalf of the customer is
known as a Collecting banker

A banker is not legally obligated to receive cheques from the client, but now the
collection of checks has become a main feature of a banker with a widening
banking procedure and a broader use of crossed checks, which are invariably
only obtained by a banker.

A banker receives cheques from his client and behaves

1. as a holder for value, or 

2. as his agent,
Banker as a holder for value 
A banking entity becomes the holder for value in the below mentioned ways: 

(a) by lending further with the same value of the cheque; 

(b) By paying the amount of the cheque or any share of it in cash or in the
account before being sent for clearing

(c) by committing to that client, either at the time or earlier , that he may draw
the cheque before it is cleared;

(d) by approving a current overdraft in avowed reduction of the check; and 

(e) by providing cash for the cheque over the counter while it is in for collection.

Collecting Banker as an Agent 

A collecting banker acts as the customer’s agent when he credits the check to
the latter’s account after a drawee’s banker actually pays the money. He then
will be permitted to take the sum of the cheque.

STATUTORY PROTECTION AVAILABLE TO COLLECTING BANKER-

https://indiafreenotes.com/statutory-protection-to-collecting-banker/

define paying banker-

Paying banker refers to the banker who holds the cheques of the drawer and is
obliged to make payment if the funds of the customer are sufficient to cover the
amount of his cheque drawn.  

The paying banker is the banker who cancels the signature of the drawer on
payment of the cheque either by the usual means of authorizing a drawer’s
signature or by any method that the bank takes, which also reflects the point of
payment. In some cases, cheques are paid by stamping the cheques “Paid”,
usually with the date being included in the stamped crossing, or by perforating
the payment date onto the cheque.
As paying banker, the banker is obligated to accept the customer’s check if it is
valid and if it is issued by the holder in its original form within a reasonable
period of time and before the banker has provided orders to stop paying or
receiving notice of the death of the customer, etc., and if sufficient funds are
available to the customer’s account and that balance is available to the banker.

STATUTORY PROTECTION AVAILABLE TO PAYING BANKER-

https://indiafreenotes.com/statutory-protection-to-the-paying-banker/

 Ladbroke vs Todd
The bank was kept responsible for making the sum good because it behaved
negligently when opening the account to the degree that it did not receive any
reference.

 Harding vs London Joint Stock Bank

The bank was deemed incompetent for failing to make the employer’s necessary
inquiries as to whether the client who was an individual really had the requisite
authority to deal with the cheque.

Cls on paying banker

Viden v/s Hughes

A drew a cheque in favour of B. but A’s clerk forged the endorsement and
negotiated the cheque to H who look it benefited and for value .The cheque was
paid by A’s bank in good faith and in ordinary course of business. It has held that
the bank was not liable.

Raphael v/s Bank of England –

The Plaintiff was money changer in Paris. He received a circular from the
defendants containing a list of stolen bank. Bank of England notes with their
serial number. Afterwards he changed a stolen note, which appeared upon his
circular but he negligently failed to refer to circular before doing so. The Jury
found that there had been no dishonestly on his part. It was held that he was
entitled to recover as a bonafied holder of the note in question.

Ladipo v/s Standard bank of Nigeria Ltd :-

Where defendants paid in cash a crossed cheque drawn on them by the Plaintiff.
It was held that this amounted to negligence on their part and that they are not
entitled to debit the Plaintiff’s account with amount paid out.

Agbafe v/s Viewpoint Nigeria Ltd

In this case, The Defendant alleged that he paid the sum to Plaintiff by a cheque
and need for proper endorsement. There was no signature and cheque was
stamped paid. The cashier who purportedly paid it was not called to give
evidence and at back of cheque read ‘Mrs. Theresa Agbafe S.A 18 Akpata Street,
New Layout. The court held that the name and the address at back of cheque
were not signature and it could not be protected under the Bills of Exchange Act.

Nigerian Advertising Service Ltd v/s united bank of Africa Ltd

In this case, the court clearly states the legal position that where there were
forgeries which were not due to a customer’s negligence. It is the duty of the
banker to credit the amount of such a customer whose cheque has been forged.
But the banker may be able to recover from the forger the amount paid to him in
an action for money had received. Later on it may be liable for criminal
prosecution by the state.

Importance of Banking Sector in a Country

Banking is an integral part of the whole financial sector. It affects the country’s
economy by providing investment, credit, and infrastructure.

The banking sector plays a significant role in the economic growth and
development of any country.

The global banking sector is estimated to be over USD 20 trillion. It includes

trade, finance, insurance, and investment activities of banks.

With the advent of computers and microprocessing machines, now most banks
have been automated. Financial transactions have been made easier and
quicker. With the easy availability of funds, entrepreneurs can get more funds
for their businesses.

The Banking Sector has also helped poor farmers in developing countries by
providing them with credit facilities.
The banking sector has also been criticized for not providing people with
sufficient access to funds, a lack of transparency, too big of a size, and its role
in the global economy.

The Banking system of a country is an important pillar holding up the financial

system of the country’s economy. The major role of banks in a financial system
is the mobilization of deposits and disbursement of credit to various sectors of
the economy. The existing, elaborate banking structure of India has evolved
over several decades.

Structure of the Indian Banking System

Reserve Bank of India is the central bank of the country and regulates the
banking system of India. The structure of the banking system of India can be
broadly divided into scheduled banks, non-scheduled banks and development
banks.

Banks that are included in the second schedule of the Reserve Bank of India
Act, 1934 are considered to be scheduled banks.

All scheduled banks enjoy the following facilities:

Such a bank becomes eligible for debts/loans on bank rate from the RBI

Such a bank automatically acquires the membership of a clearing house.

All banks which are not included in the second section of the Reserve Bank of
India Act, 1934 are Non-scheduled Banks. They are not eligible to borrow from
the RBI for normal banking purposes except for emergencies.

Scheduled banks are further divided into commercial and cooperative banks.

Scheduled, Non-Scheduled Banks and Development Banks

Commercial Banks
The institutions that accept deposits from the general public and advance loans
with the purpose of earning profits are known as Commercial Banks.

Commercial banks can be broadly divided into public sector, private sector,
foreign banks and RRBs.

In Public Sector Banks the majority stake is held by the government. After the
recent amalgamation of smaller banks with larger banks, there are 12 public
sector banks in India as of now. An example of Public Sector Bank is State Bank
of India.

Private Sector Banks are banks where the major stakes in the equity are owned
by private stakeholders or business houses. A few major private sector banks in
India are HDFC Bank, Kotak Mahindra Bank, ICICI Bank etc.

A Foreign Bank is a bank that has its headquarters outside the country but runs
its offices as a private entity at any other location outside the country. Such
banks are under an obligation to operate under the regulations provided by the
central bank of the country as well as the rule prescribed by the parent
organization located outside India. An example of Foreign Bank in India is Citi
Bank.

Regional Rural Banks were established under the Regional Rural Banks
Ordinance, 1975 with the aim of ensuring sufficient institutional credit for
agriculture and other rural sectors. The area of operation of RRBs is limited to
the area notified by the Government. RRBs are owned jointly by the
Government of India, the State Government and Sponsor Banks. An example of
RRB in India is Arunachal Pradesh Rural Bank.

Cooperative Banks

A Cooperative Bank is a financial entity that belongs to its members, who are
also the owners as well as the customers of their bank. They provide their
members with numerous banking and financial services. Cooperative banks are
the primary supporters of agricultural activities, some small-scale industries and
self-employed workers. An example of a Cooperative Bank in India is Mehsana
Urban Co-operative Bank.

At the ground level, individuals come together to form a Credit Co-operative

Society. The individuals in the society include an association of borrowers and
non-borrowers residing in a particular locality and taking interest in the
business affairs of one another. As membership is practically open to all
inhabitants of a locality, people of different status are brought together into the
common organization. All the societies in an area come together to form a
Central Co-operative Banks.

Cooperative banks are further divided into two categories – urban and rural.

Rural cooperative Banks are either short-term or long-term.

Short-term cooperative banks can be subdivided into State Co-operative Banks,

District Central Co-operative Banks, Primary Agricultural Credit Societies.

Long-term banks are either State Cooperative Agriculture and Rural

Development Banks (SCARDBs) or Primary Cooperative Agriculture and Rural
Development Banks (PCARDBs).

Urban Co-operative Banks (UCBs) refer to primary cooperative banks located in

urban and semi-urban areas.

Development Banks

Financial institutions that provide long-term credit in order to support capital-

intensive investments spread over a long period and yielding low rates of return
with considerable social benefits are known as Development Banks. The major
development banks in India are; Industrial Finance Corporation of India (IFCI
Ltd), 1948, Industrial Development Bank of India’ (IDBI) 1964, Export-Import
Banks of India (EXIM) 1982, Small Industries Development Bank Of India
(SIDBI) 1989, National Bank for Agriculture and Rural Development (NABARD)
1982.

The banking system of a country has the capability to heavily influence the
development of a country’s economy. It is also instrumental in the development
of rural and suburban regions of a country as it provides capital for small
businesses and helps them to grow their business. The organized financial
system comprises Commercial Banks, Regional Rural Banks (RRBs), Urban Co-
operative Banks (UCBs), Primary Agricultural Credit Societies (PACS) etc. caters
to the financial service requirement of the people. The initiatives taken by the
Reserve Bank and the Government of India in order to promote financial
inclusion have considerably improved the access to the formal financial
institutions. Thus, the banking system of a country is very significant not only
for economic growth but also for promoting economic equality.
The main characteristics/ features of a bank are discussed below:-

1. Dealing with Money

The bank is a financial institution that deals with other people’s money, i.e., the
money given by depositors.

2. Individual/Firm/Company

A bank may be a person, firm, or company. A banking company is a company

that is in the business of banking.

3. Acceptance of Deposit

A bank accepts money from people in deposits that are usually repayable on
demand or after a fixed period expires. It gives safety to the deposits of its
customers. It also acts as a custodian of funds of its customers.

4. Giving Advances

A bank lends out money in loans to those who require it for different purposes.

5. Payment and Withdrawal

A bank provides its customers with an easy payment and withdrawal facility in
checks and drafts. It also brings bank money into circulation. This money is in
the form of checks, drafts, etc.

6. Agency and Utility Services

A bank provides various banking facilities to its customers. They include general
utility services and agency services.

7. Profit and Service Orientation

A bank is a profit-seeking institution with having service-oriented approach.

 8. Ever-increasing

Functions Banking is an evolutionary concept. There is continuous expansion

and diversification regarding a bank’s functions, services, and activities.

9. Connecting Link

A bank acts as a connecting link between borrowers and lenders of money.

Banks collect money from those who have surplus money and give the same to
those who require money.

10. Banking Business

A bank’s main activity should be to do banking business that should not be a

subsidiary of any other business.

11. Name Identity

A bank should always add the word “bank” to its name to let people know that it
is a bank that deals in money.

Banking fraud

Overview

Bank fraud is a purposeful act of omission or conduct by any person in the

course of a banking transaction or in the bank’s books of accounts, which
results in unlawful temporary gain to any individual or otherwise, with or
without any monetary loss to the bank. The losses incurred by banks as a
consequence of fraud are equal to the combined losses incurred as a
consequence of offences such as robbery, dacoity, burglary, and theft.
Unauthorized credit facilitates are extended for illegal gratification such as cash
credit allowed against pledge of goods, hypothecation of goods against bills, or
against book debts.

“‘Fraud’ denotes a false statement made knowingly or without trust in its truth,
or recklessly careless, whether true or untrue,” according to Lord Herschell.
Any fraud conducted by a bank employee or in conjunction with a borrower has
two key components, namely,

First, there is the subjective intention, and

There is the objective opportunity.

Different types of banking frauds

Phishing:

It is an attempt to ‘fish’ for your banking details. Phishing could be an e-mail

that appears to be from a known institution like banks / a popular website.
Please note that banks will never ask for confidential data like login and
transaction password, One Time Password (OTP) etc.

Spear Phishing:

Spear phishing is a targeted phishing attempt through an e-mail that appears to

come not only from a trusted source, but often from someone in your own
company, a superior in many cases, or from a close relative. The subject line
address is customized / personalized and often will be one of relevance to either
current projects of developments within the company or may be related to a
family event. The violation occurs when the user opens the e-mails and clicks
on the link attached. Immediately Trojans or malware gets downloaded or a
form appears on the screen, in which data needs to be filled in by the recipient.

Spoofing:

Website spoofing is the act of creating a website, as a hoax, with the intention
of performing fraud. To make spoof sites seem legitimate, phishers use the
names, logos, graphics and even code of the actual website. They can even fake
the URL that appears in the address field at the top of your browser window and
the Padlock icon that appears at the bottom right corner.

Vishing:

Vishing is an attempt of a fraudster to take confidential details from you over a

phone call like user id, login & transaction password, OTP (One time password),
URN (Unique registration number), Card PIN, Grid card values, CVV or any
personal parameters such as date of birth, mother’s maiden name. Fraudsters
claim to represent banks and attempt to trick customers into providing their
personal and financial details over the phone.

Skimming:

Skimming is an act of stealing information through the magnetic strip on the

cards that are used in ATMs and merchant establishments. Fraudsters collect
information from a credit/debit/ATM card by reading the magnetic strip on the
reverse of the card. For doing this, they conceal a small device in the card slot
of ATM’s or merchant payment terminals. This ‘skimmer’ scans the card details
and stores its information. Tiny strategically positioned camera may also be
used to capture the PIN. Skimming can occur in ATMs, restaurants, shops or
other locations.

Smishing:

It is a combination of short message service (SMS/ text messaging) and

phishing (the act of emailing someone with the intent of obtaining personal
information that can be used for identity theft). Messages are being received
across the country by cell phone users claiming their accounts are delinquent,
need to be updated or even to register for a new program. Links in the message
and toll-free telephone numbers are being used for this fraud.

SIM Swap:

Under SIM swap/exchange, fraudster manages to gets a new SIM card issued
for your registered mobile number through the mobile service provider. With
the help of the new SIM card fraudster gets OTP & alerts required for doing
financial transactions through your bank account.

Advantages of Overdraft

Following are the advantages of bank overdraft:

 Helps in managing the availability of cash for a business or an individual.

 Helps in fulfilling urgent cash requirements.
 Interest needs to be paid only on the amount that is utilised and not the
total limit.
 There is less amount of paperwork involved in availing bank overdraft.
 There is no requirement of collateral.

Disadvantages of Overdraft
Following are some of the disadvantages of the bank overdraft:

 Higher interest rate charged for the loan facility availed.

 It is offered only to the bank account holders.
 The limit offered depends upon the financial position of the individual or
business.
 The interest rate is not fixed and changes frequently.
 Is not an ideal option for long term financing.

What is/define Money Market?

A money market is a mechanism which makes possible for borrowers and

lenders to come together. Essentially it refers to a market of short-term funds.
It meets the short-term requirements of the borrowers and provides liquidity of
cash to the lenders. A market or a segment of the financial market in which
lending and borrowing of short-term funds take place is known as a Money
Market.

In the words of Crowther, money market is the name given to the various firms
and institutions that deal with various grade of money.

According to Madden and Nadler, “a money market is a mechanism through

which short-term loans are loans and borrowed and through which a large part
of the financial transactions of a particular country or of the world are cleared”.

A money market primarily deals with highly liquid and low-risk instruments
having maturity, usually with a range from overnight to one year. In a money
market, the short-term surplus investible funds with the banks and other
financial institutions are bid by borrowers. It plays a crucial role in facilitating
efficient fund allocation. It also helps meet short-term fund requirements of
different participants of an economy. The basic objectives of the Money Market
include short-term financing, liquidity management, low-risk investments,
benchmark interest rates, market stability and transparency, and monetary
policy implementation.

A Money Market is not the same as a Capital Market. The former is a market
that deals with borrowing and lending of short-term funds; however, the latter
is a market that deals with long-term funds. Even though these markets are
different from each other, they are closely related as there is some overlapping
between the short-term and long-term loan transactions. A money market is a
part or segment of the financial market. A financial market includes a money
market, capital market, government securities market, and foreign exchange
market.

Composition

The money market is composed of several types of securities including short-

term Treasuries (e.g. T-bills), certificates of deposit (CDs), commercial paper,
repurchase agreements (repos), and money market mutual funds that invest in
these instruments.

Treasury Bills (T-bills) Short-term debt securities are issued by governments

to fund short-term cash requirements. Issued at a discount to face value.
Maturity typically in three months, six months, or one year.

Certificates of Deposit (CDs) Time deposits issued by banks and financial

institutions. Fixed maturities range from a few days to one year. Offer fixed
interest rates. Negotiable instruments are tradable in the secondary market.

Commercial Papers (CPs) Unsecured promissory notes are issued by

corporations to raise short-term funds. Fixed maturities range from a few days
to one year. Typically issued at a discount to face value.

Repurchase Agreements (Repos) Short-term agreements are where one

party sells securities with an agreement to repurchase at a later date.
Commonly used for short-term borrowing or lending of funds. Government
securities are often used as collateral.

Money Market Mutual Funds Investment funds that pool money from
individual investors and invest in a diversified portfolio. Provide access to
money market investments with relatively low investment amounts. Invest in a
variety of money market instruments.

Structure of Indian Money Markets

The Indian monetary market has two broad categories – the organized sector
and the unorganized sector.

Organized or modern Sector: This sector comprises of the governments, the

RBI, the other commercial banks, rural banks, and even foreign banks. The RBI
organizes and controls this sector. Other corporations like the LIC, UTI, etc also
participate in this sector but not directly. Other large companies and corporates
also participate in this sector through banks.
The banks included in the organised or modern sector of the Indian Money
Market are SBI, RBI, Private Scheduled Commercial Banks, Non-scheduled
Commercial Banks, Nationalised Banks, Foreign Exchange Banks, and
Cooperative Banks.

Unorganized Or indigenous sector: These are the indigenous banks and the local
money lenders and hundis etc. Their activities are not controlled by the RBI or
any other body, so they are the unorganized sector.

However, the participants included in the unorganised or indigenous sector of

the Indian Money Market are Sarrafs, Mahajans, Sahukars, Chettiars, and
Seths. These participants carry on the moneylending business in the rural and
semi-urban areas of India. The organised and the unorganised sectors of the
Indian Money Market have little contact between them.

The Reserve Bank of India has more or less complete control over the modern
sector of the Indian Money Market. However, despite the fact that a major
portion of the trade credit and industry credit is provided by the unorganised
sector, RBI does not have control over it.

Functions of Money Market

The role of the money market in India can be discussed under the following
categories:

• Access to money for short-term borrowers

Money markets provide easy access to money for short-term borrowers, making
it easier to borrow from markets at reasonable rates of interest.

• Liquidity for economic growth

The instruments of the money market are highly liquid. They facilitate better
management of liquidity by the authorities leading to better borrowing and
lending which turns into better economic growth.

• Portfolio management

Money markets have numerous instruments to suit the diverse need of

investors and borrowers. Investors can build a portfolio in money markets
according to their risk and return requirements.
 • Economization of use of cash

Money markets contain various close substitutes of money but not actual
money. Therefore, it economizes the uses and utilities of cash.

• Demand and supply equilibrium

Money markets depend on the rational allocation of money and other resources
while mobilizing savings into various investment channels. This helps in
maintaining supply and demand equilibrium.

• Monetary policy implementation

Central banks implement monetary policies and money markets help in the
successful implementation of these policies. The money market aims at
equidistribution of money to various sectors to increase the speed of economic
growth.

• Fulfilling financial requirements of the government:

Governments can fulfil their short-term monetary requirements through the use
of treasury bills in the money markets.

Characteristics of the Indian Money Market

Some of the key characteristics or features of the Indian Money Market are as
follows:

Segmented Structure: The Indian money market can be categorised into

organised and unorganised sectors. The organised sector includes institutions
like the Reserve Bank of India (RBI), commercial banks, cooperative banks, and
other financial institutions. However, the unorganised sector comprises
indigenous bankers and money lenders.

Regulatory Oversight by the RBI: The Reserve Bank of India plays a pivotal role
in regulating and supervising the Indian money market. It controls the money
supply in the economy, manages liquidity, and ensures the stability of the
financial system.

Focus on Short-Term Financing: The Indian money market predominantly deals

with short-term financial instruments having maturities of up to one year. It
enables participants to fulfil their short-term funding requirements and
efficiently manage liquidity.

Diverse Array of Instruments: The Indian money market offers a wide range of
instruments, including treasury bills, certificates of deposit, commercial papers,
call money, etc. These instruments serve as avenues for short-term borrowing,
lending, and investment activities.

High Liquidity: The Indian money market is known for its high liquidity due to
the presence of diverse participants and instruments. Market participants can
readily buy or sell their holdings without significant price fluctuations.

Low-risk Instruments: Instruments in the Indian money market are generally

considered low-risk because of their short maturities and backing by credible
issuers such as the government, banks, and financial institutions. Consequently,
they are attractive to risk-averse investors.

Significance in Monetary Policy Transmission: The money market plays a critical

role in transmitting monetary policy decisions. The RBI employs various tools,
such as open market operations, repo rate, and reverse repo rate, to regulate
liquidity in the money market and influence overall interest rates in the
economy.

Dominance of Institutional Investors: Institutional investors, including banks,

financial institutions, and mutual funds, primarily dominate the Indian money
market. Individual retail investors have limited direct participation, although
they can indirectly access the money market through mutual funds and other
investment vehicles.

Interconnectedness with Other Financial Markets: The Indian money market

exhibits interconnections with other segments of the financial market, such as
the capital market and foreign exchange market. Funds from the money market
can flow into long-term investments or be utilised for currency trading.

Ongoing Infrastructure Development: The Indian money market has

experienced significant growth and development in recent years. Efforts have
been made to enhance market infrastructure, improve transparency, and
introduce new instruments to cater to the evolving needs of participants.

Defects of the indian money market

The Indian money market has been associated with several defects that hinder
its efficient functioning. Some of the defects of the Indian money market are as
follows:

Existence of Unorganised Money Market: The Indian money market consists of

both organised and unorganised sectors. The unorganised sector, which
includes indigenous bankers and moneylenders, lacks proper regulations and
operates outside the purview of RBI. This leads to issues such as lack of
transparency, high-interest rates, and exploitation of borrowers. Borrowers may
face difficulties in accessing fair and transparent lending practices, affecting the
overall efficiency of the market.

Absence of Cooperation amongst the Members of the Money Market: The lack of
cooperation and coordination among the various participants in the money
market, including banks, financial institutions, and the government, hampers
the smooth functioning of the market. Without effective collaboration, the
market may experience inefficiencies, liquidity problems, and a fragmented
structure. Cooperative efforts are necessary to ensure the stability and optimal
functioning of the money market.

Lack of Uniformity in Interest Rates in the Money Market: In the Indian money
market, interest rates are not uniform across different segments and
participants. This lack of uniformity creates disparities and uncertainties,
making it difficult for market participants to make informed decisions. It also
affects the transmission of monetary policy and the overall stability of the
market. Transparent and consistent interest rate mechanisms are essential for
an efficient money market.

Absence of Organised Bill Market: A well-developed bill market is crucial for the
functioning of the money market. However, in India, the bill market is not
adequately organised. This absence of an organised bill market limits the
availability of short-term credit instruments, such as treasury bills and
commercial bills, which are essential for liquidity management and financing
trade transactions. A well-regulated bill market is necessary to facilitate efficient
short-term financing.

Seasonal Financial Stringency: The Indian money market experiences seasonal

fluctuations in liquidity and financial stringency. This is primarily due to factors
like agricultural cycles, festive seasons, and government borrowing patterns.
These fluctuations can lead to volatility in interest rates and create uncertainties
for market participants. Strategies to manage these seasonal fluctuations are
necessary for maintaining stability.
Shortage of Capital in the Money Market: The Indian money market faces a
shortage of capital to meet trade and industry requirements. The limited
availability of capital hampers the development of various sectors and restricts
the growth potential of the overall economy. Adequate availability of capital is
crucial for sustaining economic growth and meeting the funding needs of
businesses and individuals.

Lack of Development of the Indian Money Market: The Indian money market is
not as developed as other major global money markets. It lacks depth, breadth,
and sophistication in terms of financial products and instruments. This hinders
the efficient allocation of funds and impedes the overall growth and stability of
the financial system. Developing a diverse range of financial products and
instruments can enhance the market’s efficiency.

Excessive Number of Indigenous Bankers in the Money Market: The presence of

a large number of indigenous bankers, such as moneylenders and unregulated
non-banking financial entities, creates issues of unfair practices, lack of
accountability, and high-interest rates. It also contributes to the unorganised
nature of the money market. Proper regulation and oversight are necessary to
mitigate these issues and ensure fair and transparent practices.

Absence of Specialised Institutions in the Money Market: The Indian money

market lacks specialised institutions that can cater to specific financial needs
and provide specialised financial services. This absence limits the options
available to market participants and hampers the overall efficiency of the money
market. The establishment and strengthening of specialised institutions can
enhance the market’s ability to meet diverse financial requirements.

Non-availability of Credit Instruments: The Indian money market suffers from a

lack of diverse and readily available credit instruments. The absence of a wide
range of credit instruments restricts the flexibility and effectiveness of financing
options for borrowers and lenders. Developing a comprehensive range of credit
instruments can provide market participants with more options for managing
their financing needs.

Addressing these defects requires various measures. Regulatory reforms are

necessary to ensure proper oversight and regulation of all market participants.
Improved coordination among market participants, including banks, financial
institutions, and the government, is essential for efficient market functioning.
Developing organised bill markets and specialised institutions can enhance the
availability of credit instruments and cater to specific financial needs.
Furthermore, promoting financial literacy among market participants can
empower them to make informed decisions and contribute to a more efficient
money market.
Guarantee

Guarantee enables a person to get a loan, to get goods on credit, etc.

Guarantee means to give surety or assume responsibility. It is an agreement to
answer for the debt of another in case he makes default.

The Oxford Dictionary of Law defines guarantee as a secondary agreement in

which a person (guarantor) is liable for a debt or default of another (principal
debtor) who is the party primarily liable for the debt. A guarantor who has paid
out on his guarantee has a right to be indemnified by the principal debtor.

Refer def in book pg 293

Indemnity

‘indemnity’ is protection against future loss in the form of a promise to pay for
loss of money, goods, etc. It is security against or compensation for loss
incurred.

According to Halsbury, indemnity refers to an express or implied contract that

protects a person who has entered or is going to enter into a contract or incur
any other duty from loss, irrespective of the default incurred by a third person.

Refer def in book pg 294

Essential features of guarantee in bk pg 293 n 294

Pros n cons of accepting guarantee as a security for banker’s advance-

Bank guarantee has its own advantages and disadvantages. The advantages
are:

• Bank guarantee reduces the financial risk involved in the business

transaction.
• Due to low risk, it encourages the seller/beneficiaries to expand
their business on a credit basis.
• Banks generally charge low fees for guarantees, which is beneficial
to even small-scale business.
 • When banks analyse and certify the financial stability of the
business, its credibility increases and this, in turn, increase
business opportunities.
• Mostly, the guarantee requires fewer documents and is processed
quickly by the banks (if all the documents are submitted).

On the flip side, there are some disadvantages such as:

• Sometimes, the banks are so rigid in assessing the financial

position of the business. This makes the process complicated and
time-consuming.
• With the strict assessment of banks, it is very difficult to obtain a
bank guarantee by loss-making entities.
• For certain guarantees involving high-value or high-risk
transactions, banks will require collateral security to process the
guarantee.

Difference between both in bk pg 294 n 295.

Kinds/tupes of g in pg 295

Note- A Bank Guarantee constitutes “ Contingent Liability” for the banker due to
the fact that through initially there is no outlay of funds , the bank is liable to
honour the payment as per terms of the bank guarantee in the case of default
by the borrower or buyer or seller in fulfilling the covenants of the guarantee.A
contingent liability is a liability or a potential loss that may occur in the future
depending on the outcome of a specific event.

NBFCs

Meaning:

Non-Banking Financial Companies also known as NBF Institutions relates to

assets institutions providing financial services without the need for a banking
licence or without a bank’s legal definition being fulfilled. Such entities are
registered under the Companies Act, 1956 and, as specified under Section 45-IA
of the RBI Act, 1934, do operation as a non-banking financial institution.
An NBFC is primarily involved in the business of loans, stocks, equity
acquisition, insurance business, government-issued bonds, chit fund business,
and much more.

An organization whose principal business is linked to agriculture, sale, purchase

or construction of immovable property, industrial production, sale and so on.

The key difference among NBFC & the bank in which we can withdraw or deposit
cash in a bank when we required it, but NBFC does not allow withdrawals or
deposit cash when it is necessary.

NBFC deposits are not considered as investments, like the amount you invest
for your health insurance or LIC policy and so on. It is just long-term premiums
or deposits.

NBFC’s Requirement for RBI certification:

A corporation registered under the Companies Act, 1956 and willing to start a
non – banking organization business, as specified in Section 45 IA of the RBI
Act, 1934, is needed to deal with the applicable conditions:

Under Section 3 of the Companies Act, 1956, it should be reported.

It should own an Rs . 2 crores minimum net fund. Even so, the criteria for a
minimum net-owned fund for specific NBFCs can differ.

Few examples of NBFC:

LIC of India

Housing finance firms regulated by the National Housing Bank (NHB).

Chit fund firms as described in Section 2 of Section (b) of the Chit Funds Act,
1982, and controlled by the state government

Stockbroking companies, merchant banking companies, SEBI controlled venture

capital finances

Businesses of Nidhi that are registered under section 620A of the Companies
Act, 1956, and governed by the Ministry of Corporations.
The role of NBFCs can be summarized as follows:

Providing Credit: NBFCs credit various population segments, including

individuals, small and medium enterprises (SMEs), and large corporations.
NBFCs are generally more flexible than banks in terms of lending criteria, and
they can provide credit to those who may not meet the stringent requirements
of traditional banks.

Mobilizing Savings: NBFCs mobilize savings from different sources, such as

retail investors, high-net-worth individuals (HNIs), and institutional investors,
and they use these savings to finance various activities.

Providing Investment Services: NBFCs provide investment services such as

portfolio management, investment advisory, and distribution of financial
products.

Providing Payment Services: NBFCs also provide payment services such as

issuing debit and credit cards, electronic fund transfers, and mobile banking.
Supporting Infrastructure Development: NBFCs also play a key role in
supporting infrastructure development by providing long-term finance to
infrastructure projects.

In conclusion, the scope of NBFCs is broad and diverse. They play a significant
role in the economy by providing financial services to the unbanked and
underbanked population, funding critical infrastructure projects, and supporting
the growth of the MSME sector. However, NBFCs face several challenges, such
as access to funding, regulatory compliance, and operational efficiency.
Addressing these challenges will be crucial for the sustainable growth of the
NBFC sector and its contribution to the economy.

Savings account

A savings account is a financial instrument held with a bank where

accountholders deposit money in their account and earn modest interests on it.
People prefer these accounts because of their ease of use, safety, reliability,
and liquidity. One can deposit money without any limitation and withdraw when
required.

The purpose of a savings account is to provide a medium for people to stash

money that they do not intend to use regularly in a safe place. Accountholders
earn decent interest on the amount deposited in their account at a pre-decided
rate that changes from time to time. The interest is paid on a timely basis can
be from monthly, quarterly, or biannually to yearly. The best thing about a
savings account is that one can withdraw total funds almost immediately and
use it as and when required.

Some common features of a savings bank account:

Deposit and Withdrawal: A savings account enables you to deposit money into
the account whenever you have surplus funds. You can also withdraw funds
from the account as needed, either by visiting a bank branch, using an ATM, or
transferring funds online.

Interest: One of the primary features of a savings account is the ability to earn
interest on the balance. The interest rate may vary depending on the bank and
prevailing market conditions. The interest is usually calculated on a daily or
monthly basis and credited to the account periodically. The general rate of
interest is 3-7%.

Minimum Balance Requirement: Many banks require a minimum balance to be

maintained in the savings account. Falling below this threshold may result in
penalty charges. The minimum balance requirement varies among banks and
account types.

ATM/Debit Card: Savings accounts often come with an ATM or debit card that
allows you to withdraw cash from ATMs, make purchases at point-of-sale (POS)
terminals, and conduct online transactions.

Passbook or Account Statement: Banks provide a passbook or account

statement that records the transactions made in the savings account. This helps
you track your deposits, withdrawals, and interest earned.

Nomination Facility: You can nominate a person who will be entitled to receive
the funds in your savings account in case of your unfortunate demise.

Online and Mobile Banking: Most banks provide online and mobile banking
facilities, allowing you to access and manage your savings account remotely.
This includes features like fund transfers, bill payments, balance inquiries, and
transaction history.

Overdraft Facility: Some savings accounts may offer an overdraft facility, which
allows you to withdraw funds exceeding your account balance up to a
predetermined limit. Interest is charged on the overdrawn amount.
Safety and Security: Savings accounts are regulated by banking authorities,
providing a secure and protected environment for your funds. Banks employ
various security measures to safeguard your account from unauthorized access
and fraud.

State Bank of India (SBI) is an Indian Multinational, Public Sector Banking, and
Financial Services. It is statutory and is headquartered in Mumbai. The rich SBI
history and legacy of over 200 years, empowers SBI as the most trusted Bank
by Indians through generations. SBI is the largest bank in India which serves
over 44 crore customers of our nation.

The State Bank of India is a public sector financial institution and multinational
company. The bank holds 23 percent of the market share in the banking
industry in terms of asset base and 25 percent in loans and deposit segments,
making it the largest statutory financial services organization in India.

History/Origin of State Bank of India

The origin of the State Bank of India goes back to the establishment of the Bank
of Calcutta in Calcutta on 2 June 1806.

Three years later the bank received its charter and was re-designed as the Bank
of Bengal (2 January 1809).

It was the first joint-stock bank of British India sponsored by the Government of
Bengal. The Bank of Bombay (15 April 1840) and the Bank of Madras (1 July
1843) followed the Bank of Bengal.

These three banks remained at the apex of modern banking in India till their
amalgamation as the Imperial Bank of India on 27 January 1921.

When India attained freedom, the Imperial Bank had a capital base (including
reserves) of INR 11.85 crores, deposits and advances of INR 275.14 crores and
INR 72.94 crores respectively, and a network of 172 branches and more than
200 sub-offices extending all over the country.

The All India Rural Credit Survey Committee recommended the creation of a
state-partnered and state-sponsored bank by taking over the Imperial Bank of
India. Thus, an act was passed in Parliament in May 1955 and the State Bank of
India was constituted on 1 July 1955.
Later, the State Bank of India (Subsidiary Banks) Act was passed in 1959,
enabling the State Bank of India to take over eight former State-associated
banks as its subsidiaries (later named Associates).

Functions

1.It provides a wide range of commercial banking services.

2.It accepts deposits from the general public and institutional depositors.
3. It offers loans to entities that SBI believes are capable of servicing
loans.
4. It additionally sells and purchases gold.
5.It takes up the role of agent for the cooperative bank and the reserve
bank of India.
6.It plays the role of a government bank and a banker’s bank.
7.It underwrites issues of the stocks and bonds for its institutional clients.
8.It draws and buys bills of eexchang
9.It assumes the role of administrator and trustee for estates.

10.However, the bank is not authorized to lend funds corresponding to

stocks for more than six months.

11.It is not entitled to purchase any immovable properties, but it could

purchase only offices for official business purposes.

12.It does not have the authority to rediscount the bills. The bills
should consist of two good signatures.
3. It cannot rediscount loans against securities.
4. It cannot lend additional funds to corporate entities and individuals
beyond the slated thresholds.

Role of State Bank of India in –

# Role of State Bank of India in public sector

State Bank of India (SBI) plays a significant role in the public sector in India. As
a government-owned bank, SBI has specific responsibilities and functions
related to the public sector. Here are some key roles of SBI in the public sector:
Government Banking: SBI acts as the banker to the Indian government and its
various departments. It handles the government’s accounts, processes
payments, and facilitates transactions on behalf of the government. SBI
manages the collection of taxes, disbursement of subsidies, and other financial
transactions related to the government’s operations.

Fund Management: SBI assists in managing the government’s funds, including

cash management and investment of surplus funds. It ensures the efficient
allocation of government resources and helps in optimizing returns on
investments.

Public Sector Undertakings (PSUs): SBI provides banking services to numerous

PSUs, which are government-owned enterprises. It offers a range of banking
products and services to these entities, including account management, cash
management, credit facilities, trade finance, and financial advisory services. SBI
supports the financial needs of PSUs and facilitates their business operations.

Infrastructure Financing: SBI plays a crucial role in financing infrastructure

projects in the public sector. It provides loans and financial assistance for
various infrastructure sectors such as transportation, energy,
telecommunications, and urban development. SBI’s support helps in the
development of vital infrastructure, which is essential for economic growth and
social development.

Government Schemes and Initiatives: SBI actively participates in the

implementation of government schemes and initiatives aimed at public welfare.
It plays a crucial role in disbursing funds and providing financial services under
schemes like Direct Benefit Transfer (DBT), Pradhan Mantri Jan Dhan Yojana
(PMJDY), Pradhan Mantri Mudra Yojana (PMMY), and various other social
security and poverty alleviation programs.

Financial Inclusion: SBI contributes significantly to the government’s efforts

towards financial inclusion. It promotes the opening of bank accounts for
unbanked individuals and facilitates access to banking services in remote and
underserved areas. SBI’s extensive branch network, including rural branches,
helps in expanding the reach of banking services and promoting financial
literacy among the public.
Overall, SBI’s role in the public sector involves providing banking and financial
services to the government, public sector undertakings, and supporting
infrastructure development. It contributes to the efficient functioning of the
public sector and the overall economic development of the country.

# Role of State Bank of India in agricultural sector

State Bank of India (SBI) plays a crucial role in the agricultural sector in India.
It provides a wide range of financial products and services to farmers,
agribusinesses, and other stakeholders involved in agriculture. Here are the key
roles of SBI in the agricultural sector:

Rural and Agricultural Financing: SBI offers various credit facilities to meet the
financial requirements of farmers and agricultural enterprises. These include
agricultural term loans, crop loans, Kisan credit cards, agricultural gold loans,
and loans for farm machinery and equipment. SBI’s financing helps farmers with
working capital, investment in agricultural activities, and the purchase of inputs
and machinery.

Kisan Credit Card (KCC) Scheme: SBI plays an active role in implementing the
Kisan Credit Card scheme, which provides farmers with a single credit line for
their farming and allied activities. The KCC scheme enables farmers to access

timely credit for crop cultivation, post-harvest expenses, marketing activities,

and consumption needs. SBI issues Kisan Credit Cards to eligible farmers,
simplifying the credit process and reducing paperwork.

Rural Branch Network: SBI has an extensive branch network in rural and semi-
rural areas, ensuring access to banking services for farmers and rural
communities. These branches provide a wide range of services, including
deposit accounts, credit facilities, remittances, and financial advisory services
tailored to the specific needs of the agricultural sector.

Government Schemes: SBI actively participates in the implementation of

various government schemes aimed at agricultural development. It facilitates
the disbursement of funds and provides financial services under schemes like
the Pradhan Mantri Fasal Bima Yojana (crop insurance scheme), Rashtriya Krishi
Vikas Yojana (national agricultural development scheme), and National Rural
Livelihood Mission (NRLM). SBI’s involvement ensures the effective utilization of
government support for farmers.

Agri-Business Financing: SBI extends credit to agribusinesses involved in food

processing, agricultural marketing, dairy, poultry, fisheries, and other allied
sectors. It provides working capital loans, term loans, and project financing to
promote the growth and development of agribusiness enterprises, fostering
value addition and employment generation in rural areas.

Farmer Training and Financial Literacy: SBI conducts training programs and
financial literacy campaigns for farmers to enhance their knowledge and skills.
These initiatives aim to promote good agricultural practices, efficient use of
credit, proper financial planning, and risk management. SBI’s efforts contribute
to empowering farmers with the necessary knowledge to make informed
financial decisions.

Technology Adoption: SBI leverages technology to improve access and

efficiency in agricultural finance. It provides digital banking solutions and mobile
banking services, making it easier for farmers to access banking services and
conduct transactions. SBI’s digital platforms enable farmers to apply for loans,
check account balances, and receive updates on government schemes and
market-related information.

Overall, SBI’s role in the agricultural sector encompasses providing financial

support, implementing government schemes, facilitating credit access,
promoting financial literacy, and leveraging technology to enhance the
productivity and well-being of farmers and the agricultural community in India.

# Role of State Bank of India in other priority sectors in india

State Bank of India (SBI) plays a significant role in several priority sectors in
India, in addition to its involvement in the public and agricultural sectors. SBI’s
focus on these sectors is aimed at promoting inclusive growth, supporting
economic development, and addressing specific sectoral needs. Here are some
of the priority sectors where SBI plays a crucial role:

Micro, Small, and Medium Enterprises (MSMEs):

SBI provides financial support to MSMEs through various credit facilities such as
working capital loans, term loans, project finance, and specialized schemes like
the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE).
SBI offers advisory services, mentoring, and assistance in project
implementation to promote entrepreneurship and the growth of MSMEs.

It facilitates credit linkage and collaboration with MSMEs in sectors like

manufacturing, services, and trade, contributing to job creation, export
promotion, and economic diversification.

Education:

SBI offers education loans to students to pursue higher education in India and
abroad. These loans cover tuition fees, living expenses, books, travel, and other
related costs.

SBI’s education loan schemes have favorable terms and conditions, including
competitive interest rates, flexible repayment options, and extended repayment
periods after course completion.

The bank also supports government initiatives like Skill India and vocational
training programs to enhance employability and skill development.

Housing:

SBI provides housing loans to individuals for the purchase, construction,

extension, and renovation of residential properties.

The bank actively participates in government initiatives like Pradhan Mantri

Awas Yojana (PMAY), which aims to provide affordable housing to economically
weaker sections, lower-income groups, and middle-income groups.

SBI’s housing loan schemes offer attractive interest rates, flexible repayment
options, and longer repayment tenures to facilitate home ownership.

Financial Inclusion:

SBI plays a pivotal role in the government’s financial inclusion efforts, reaching
out to the unbanked and underbanked populations.
It supports initiatives like the Pradhan Mantri Jan Dhan Yojana (PMJDY), which
aims to provide access to banking services, savings accounts, and insurance
coverage to all individuals.

SBI’s extensive branch network, including in rural and semi-urban areas, and
digital banking solutions help expand financial access to marginalized
communities.

Renewable Energy and Environment:

SBI supports the development of renewable energy projects by providing

financing and advisory services to renewable energy companies, project
developers, and entrepreneurs.

It offers customized financial solutions, including term loans, working capital,

and project finance, to promote investments in renewable energy such as solar,
wind, hydropower, and biomass.

SBI contributes to environmental sustainability by encouraging green initiatives,

financing eco-friendly projects, and promoting energy-efficient practices.

These priority sectors reflect SBI’s commitment to fostering economic growth,

promoting social development, and addressing the diverse needs of various
segments of society in India. The bank’s support in these sectors plays a crucial
role in driving inclusive and sustainable development in the country.

The Reserve Bank of India is the apex banking institution of the country. It is in
charge of ensuring economic stability and regulating India’s financial markets.
The Reserve Bank of India is the major financial regulator and central bank of
the country. It was established by the Reserve Bank of India Act 1934 and
began operations on 1 April 1935. INITIALLY, the RBI was private, but after
India’s 1947 declaration of independence from the United Kingdom, it was
nationalized in 1949. The RBI’s current role as India’s central bank is to
maintain the country’s monetary stability by regulating the economy, issuing
currency, supporting growth, and monitoring financial institutions.

The RBI is governed by a governor appointed to four-year terms. The RBI is

headquartered in Mumbai, with regional boards in Calcutta, Chennai, and New
Delhi and 27 regional offices across the country. Apart from its original
legislation (the Reserve Bank of India Act 1934), the RBI is governed by the
Banking Regulation Act 1949, the Government Securities Act 2006, and the
Payment and Settlement Systems Act 2007.

Origin/evolution of rbi

There has been a long series of efforts to establish a central bank in our
country. The earliest attempt may be traced back to 1773, when Warren
Hastings, the Governor of Bengal (later Governor-General), felt the need for a
central bank in the country and recommended that a “General Bank in Bengal
and Bihar” be founded.

The Report of the Chamberlain Commission in 1913 also raised the issue of the
founding of a central bank in the country. As a supplement to this report,
Professor J.M. Keynes chalked out the first comprehensive plan for an Indian
central bank. Keynes’ plan, however, did not come into effect, owing to the
outbreak of the First World War.

In 1921, the Imperial Bank of India was set-up by the amalgamation of the
three Presidency Banks, which performed a few central banking functions,
though primarily it remained as a commercial bank. Specifically, the Imperial
Bank served as a banker to the government and in some capacity as banker’s
bank till the establishment of the Reserve Bank of India in 1935.

The founding of a central bank in India was again stressed by the Royal
Commission on Indian Currency and Finance (popularly known as the Hilton-
Young Commission) in 1926. The Commission suggested the name “Reserve
Bank of India” for the country’s central bank. In January 1927, a bill to this
effect was introduced in the Legislative Assembly, but was dropped on
constitutional grounds. In 1931 the Indian Central Banking Enquiry Committee
made a strong recommendation for the establishment of a Reserve Bank.

The question of starting a central bank in the country again received serious
attention with the publication of a White Paper on Indian Constitutional
Reforms. It insisted that the British make the transfer of responsibility from the
Central Government to Indian hands provided a Reserve Bank, free from
political influences, is founded and it operates successfully.

Eventually, a fresh bill to this effect was introduced in the Indian Legislative
Assembly on September 8, 1933. The bill was passed and received the assent of
the Governor-General on March 6, 1934 and became the Reserve Bank of India
Act, 1934. In accordance with the Act, the Reserve Bank of India was
constituted and it commenced operations from April 1, 1935.
Originally, the Reserve Bank was constituted as a shareholders’ bank, based on
the model of leading foreign central banks of those days. The bank’s fully paid-
up share capital was Rs. 5 crores divided into shares of Rs. 100 each. Of this,
Rs. 4,97,80,000 were subscribed by the private shareholders and Rs. 2,20,000
were subscribed by the Central Government for disposal of 2,200 shares at par
to the Directors of the Bank (including members of the Local Boards) seeking
the minimum share qualification. The share capital of the bank has remained
unchanged until today.

However, realising the need for a close integration of the monetary and credit
policies of the bank and the macro-economic policies of the Government, the
notion of state ownership of the bank was raised and justified from time to
time.

After independence, the Government of India took the decision to nationalise

the Reserve Bank. The Reserve Bank (Transfer to Public Ownership) Act, 1948
was passed and the Government took over the Reserve Bank of India from
private shareholders by paying adequate compensation to them. On January 1,
1949, the Reserve Bank of India started functioning as a state-owned central
banking institution.

Definition of Commercial Bank

Commercial bank refers to the banking company, which is established to serve

individuals, organisations, and businesses. It is a financial institution, which is
authorised to accept deposits from the general public and grant credit to them.
They are governed by the Banking Regulation Act, 1949 and supervised by the
Reserve Bank of India.

Commercial Banks provide short-term, medium-term, and long-term finance to

the public. However, it usually prefers to make short-term funding. There are a
variety of products offered by the banks, to its customers such ath

• Deposit accounts like fixed deposit, recurring deposit, savings

account, current account, etc.
• Loans such as auto loan, home loan and so on.
• ATM services
• Credit and debit card facility.
• Acts as an agent, for the collection of cheques, bills of exchange.
• Safeguards the property and wealth of persons.
• Merchant banking
 • Trade financing
• Transfer of money.

Commercial bank is a bank that is formed for the commercial purpose and
hence its primary aim to earn profit from the banking business. On the other
hand, cooperative banks are owned and operated by the members for a
common purpose i.e. to provide financial service to agriculturists and small
businessmen.

The major differences between commercial and cooperative banks are Indicated
below:

Meaning- A bank established to provide banking services to the individuals and

businesses is called Commercial Bank. A cooperative bank is a bank that
provides financing to agriculturists, rural industries and to trade and industry of
urban areas (but up to a limited extent).

Governing Act- A commercial bank is incorporated under Banking Regulation

Act, 1949. Conversely, a cooperative bank is registered under the Cooperative
Societies Act, 1965.

Area of operation- The area of operation of a commercial bank is comparatively

larger than a cooperative bank, as cooperative banks are confined to a limited
area only while commercial banks even have their branches overseas.

Motive of operation- Commercial banks are joint stock companies, incorporated

as a banking company that operates for the profit motive. As opposed to
Cooperative banks, which are cooperative organisations, that works for service
motive.

Borrowers- The borrowers of commercial banks are only account holders; they
do not have any voting power. Unlike Cooperative banks, the borrowers are
members that influence the credit policy by voting power.

Main function- Commercial bank’s primary function is to accept deposits from

the public and grants loans to individuals and businesses. In contrast to the
cooperative bank, whose primary purpose is to accept deposits from members
and public, and grant loans to farmers and small businessmen.

Banking service- Commercial banks offer an array of products to its customers,

whereas there are limited products provided by the commercial bank to its
members and public.
Interest rate on deposits- The commercial bank’s interest rate on deposits is
comparatively lesser than the cooperative bank.

Conclusion

The bank, which operates for taking deposits from and making loans to the
public is a commercial bank. On the other hand, cooperative banks are mainly
established to provide financial support to small businessmen and farmers at
the low rate of interest. The big difference between these two terms is that
while the network of former is very large whereas the network of the latter is
confined to a limited area only.

Liquidity Theory

Liquidity means the capacity to produce cash on demand at a reasonable cost. A

bank is considered to be liquid if it has ready access to immediately spendable
funds to reasonable cost at precisely the time those funds are needed. No
doubt, the most liquid asset is cash in the vaults of a bank. It is necessary for a
banker to keep a certain percentage of the deposits in the form of liquid cash as
reserve, either in his own vaults with central bank. But such liquid cash does
not earn anything and remains idle. So the banker should invest his excess
money in some assets which are liquid in a nature and any consider liquidity
ahead of profitability if there is any question of choice.

There are three different liquidity theories:

Self-liquidating theory or real bills doctrine

Self liquidating theory is also known as The real bills doctrine or the commercial
loan theory. It states that a commercial bank should advance only short-term
self-liquidating productive loans to business firms. Self-liquidating loans are
those which are meant to finance the production, and movement of goods
through the successive stages of production, storage, transportation, and
distribution.

When such goods are ultimately sold, the loans are considered to liquidate
themselves automatically. For instance, a loan given by the bank to a
businessman to finance inventories would be repaid out of the receipts from the
sale of those very inventories, and the loan would be automatically self-
liquidated.
The theory states that when commercial banks make only short term self-
liquidating productive loans, the central bank, in turn, should only land to the
banks on the security of such short-term loans. This principle would ensure the
proper degree of liquidity for each bank and the proper money supply for the
whole economy.

The central bank was expected to increase or diminish bank reserves by

rediscounting approved loans. When business expanded and the needs of trade
increased, banks were able to acquire additional reserves by rediscounting bills
with the central banks.

When business fell and the needs of trade declined, the volume of rediscounting
of bills would fall, the supply of bank reserves and the amount of bank credit
and money would also contract.

Its Merits:

Such short-term self-liquidating productive loans possess three advantages.

First, they possess liquidity that is why they liquidate themselves automatically.

Second, since they mature in the short run and are for productive purposes,
there is no risk of their running to bad debts.

Third, being productive such loans earn income for the banks.

Its Demerits:

Despite these merits, the real bills doctrine suffers from certain defects.

First, if a bank refuses to grant a fresh loan till the old loan is repaid, the
disappointed borrower will have to reduce production which will adversely affect
business activity. If all the banks follow the same rule, this may lead to
reduction in the money supply and price in the community. This may, in turn,
make it impossible for existing debtors to repay their loans in time.

Second, the doctrine assumes that loans are self-liquidating under normal
economic conditions. If there is depression, production and trade suffer and the
debtor will not be able to repay the debt at maturity.
Third, this doctrine neglects the fact that the liquidity of a bank depends on the
sale ability of its liquid assets and not on real trade bills. If a bank possesses a
variety of assets like bills and securities which can be readily should in the
money and capital markets, it can ensure safety, liquidity and profitability. Then
the bank need not rely on maturities in time of trouble.

Fourth, the basic defect of the theory is that no loan is in itself automatically
self-liquidating. A loan to a retailer to purchase inventor is not self-liquidating if
the inventories are not sold to consumers and remain with the retailer. Thus a
loan to be successful involves a third party, the consumers in this case, besides
the lender and the borrower.

Fifth, this theory is based on the “needs of trade” which is no longer accepted
as an adequate criterion for regulating this type of bank credit. If bank credit
and money supply fluctuate on the basis of the needs of trade, the central bank
cannot prevent either spiraling recession or inflation.

Shift ability theory

Anticipated income theory

The anticipated income theory was developed by H.V. Prochanow in 1944 on the
basis of the practice of extending term loans by the US commercial banks.
According to this theory, regardless of the nature and character of a borrower’s
business, the bank plans the liquidation of the term-loan from the anticipated
income of the borrower. A term-loan is for a period exceeding one year and
extending to less than five years.

It is granted against the hypothecation of machinery, stock and even

immovable property. The bank puts restrictions on the financial activities of the
borrower while granting this loan. At the time of granting a loan, the bank takes
into consideration not only the security but the anticipated earnings of the
borrower.

Thus a loan by the bank gets repaid out of the future income of the borrower in
instalments, instead of in a lump sum at the maturity of the loan.

Its Merits:

This theory is superior to the real bills doctrine and the shift ability theory
because it fulfills the three objectives of liquidity, safety and profitability.
Liquidity is assured to the bank when the borrower saves and repays the loan
regularly in instalments.

It satisfies the safety principle because the bank grants a loan not only on the
basis of a good security but also on the ability of the borrower to repay the
loan.

The bank can utilise its excess reserves in granting term-loan and is assured of
a regular income. Lastly, the term-loan is highly beneficial for the business
community which gets funds for medium-terms.

Its Demerits:

The theory of anticipated income is not free from a few defects.

a. Analyses Creditworthiness:

It is not a theory but simply a method to analyse a borrower’s creditworthiness.

It gives the bank criteria for evaluating the potential of a borrower to
successfully repay a loan on time.

b. Fails to Meet Emergency Cash Needs:

Repayment of loans in instalments to the bank no doubt provide a regular

stream of liquidity, but they fail to meet emergency cash needs of the lender
bank.

CRR and SLR are two ratios that our banking system must maintain in
accordance with the guidelines of the RBI. There are set of rules that banks
must follow to ensure that these ratios are in balance.

CRR

Cash Reserve Ratio (CRR) is a specific part of the total deposit that is held as a
reserve by the commercial banks and is mandated by the Reserve Bank of India
(RBI). This specific amount is held as a reserve in the form of cash or cash
equivalent which is stored in the bank’s vault or is sent to the RBI. CRR ensures
that the banks do not run out of money.

Cash Reserve Ratio in India is decided by the Monetary Policy Committee (MPC)
under the periodic Monetary and Credit Policy. If the CRR is low, the liquidity
with the bank increases, which in turn goes into investment and lending and
vice-versa. Higher CRR creates a negative impact on the economy and also
lowers the availability of loanable funds. As a result, it slows down the
investment and reduces the supply of money in the economy.

As per section 42 of the RBI Act, 1934 every bank is to keep a minimum
balance percentage or amount with RBI. This minimum amount percentage is
called “Cash Reserve Ratio (CRR)”. CRR enables a bank to know the amount
available with them for further investment and dealing. This rate majorly
regulates the cash flow in a country and is used to channel out any excessive
money from the system.

Cash Reserve Ratio (CRR) refers to the percentage of a commercial bank’s total
deposit that it must maintain in the form of cash with the central bank. CRR in
India is set by the Reserve Bank of India (RBI) under the powers conferred to it
by the RBI Act of 1934. It is a crucial tool used by the RBI to regulate the
percentage of money in the economy that is circulating. When the CRR is high,
banks have less money to lend, which can help control inflation. Conversely, a
lower CRR means banks have more money to lend, which can stimulate
economic growth. The present CRR is 4.50% (as of 2023).

Illustration of CRR

Now consider a scenario, let us assume Mr. Vaibhav has deposited Rs.100 with
the bank, and the bank has lent the same Rs.100 to XYZ Pvt. Ltd as a
commercial loan on condition to repay the loan back after 2 years. Now after 6
months, Mr. Vaibhav wants Rs.10 to buy a vehicle out of his deposited amount.
Now, the bank is in trouble as it does not have the money that Mr. Vaibhav had
kept with them. This is exactly the scenario that RBI and in turn every bank
wants to avoid. And this is where the Cash Reserve Ratio comes into picture.
CRR plays an important role to avoid this kind of scenario.

Objectives

• Cash Reserve Ratio ensures that a part of the bank’s deposit is with
the Central Bank and is hence, secure.
• Another objective of CRR is to keep inflation under control. During
high inflation in the economy, RBI raises the CRR to reduce the
 amount of money left with banks to sanction loans. It squeezes the
money flow in the economy, reducing investments and bringing
down inflation.

How does CRR affect the economy

Cash Reserve Ratio (CRR) is one of the main components of the RBI’s monetary
policy, which is used to regulate the money supply, level of inflation and
liquidity in the country. The higher the CRR, the lower is the liquidity with the
banks and vice-versa. During high levels of inflation, attempts are made to
reduce the flow of money in the economy.

For this, RBI increases the CRR, lowering the loanable funds available with the
banks. This, in turn, slows down investment and reduces the supply of money in
the economy. As a result, the growth of the economy is negatively impacted.
However, this also helps bring down inflation.

On the other hand, when the RBI wants to pump funds into the system, it
lowers the CRR, which increases the loanable funds with the banks. The banks
in turn sanction a large number of loans to businesses and industry for different
investment purposes. It also increases the overall supply of money in the
economy. This ultimately boosts the growth rate of the economy.

Significance/advantages of CRR

CRR is an important tool of the Monetary Policy which provides the following
benefits:

i. By adjusting the CRR, the RBI can control the amount of

money that banks have available to lend, which can help
control inflation.
c. It ensures that banks have certain amount of cash in hand,
promoting financial stability and reducing the risk of bank
failure.
d. CRR is a powerful tool for regulating the supply of money in the
economy, which can influence interest rates and economic
growth.

Disadvantages of CRR
 i. A high CRR can limit the amount of money available with
the banks for lending purposes, which can, in turn, slow
down economic growth.
ii. Money that is held as part of the CRR does not earn
interest, which can reduce bank profits.
iii. If the CRR is too high, it can cause liquidity problems for
banks, especially during times of financial stress.

SLR

Statutory Liquidity Ratio or SLR is the minimum percentage of deposits that a

commercial bank has to maintain in the form of liquid cash, gold or other
securities. It is basically the reserve requirement that banks are expected to
keep before offering credit to customers. The SLR is fixed by the RBI and is a
form of control over the credit growth in India.

The government uses the SLR to regulate inflation and fuel growth. Increasing
the SLR will control inflation in the economy while decreasing the statutory
liquidity rate will cause growth in the economy. The SLR was prescribed by
Section 24 (2A) of Banking Regulation Act, 1949.

SLR regulates the flow of money in the economy. It is the percentage of a

bank’s net time and demand liabilities that must be maintained as cash, gold,
and approved securities. Primary purpose of the SLR is to ensure that banks
have enough funds to meet their obligations to their customers. As of 2023, the
current SLR is 18.00%.

The SLR indirectly affects the lending capacity of the banks. A higher SLR
means banks have less money available for commercial lending. A low Statutory
Liquidity Ratio (SLR) indicates that banks have more funds available for lending
to the public or for investment in other profitable avenues. In case many
depositors demand back their money at the same time, the bank might struggle
to meet these demands due to the lower level of liquid assets.

SLR = 100 percent (liquid assets / demand + time liabilities).

Example

As an example, consider ABC Bank. The bank’s liquid assets are $20 million.
NTDLs are worth Rs200 million to the bank (net time and demand liabilities).
Assist the management of ABC Bank in determining the required liquidity ratio.
LA / NTDL = (Rs 40,000,000 / Rs 400,000,000)x100 Statutory Liquidity Ratio

The statutory liquidity ratio is 10%.

As a result, the bank’s SLR stands at 10%

The components of the Statutory Liquidity Ratio

Liquid Assets

Gold, government-approved securities, currency reserves, treasury notes, and

government bonds are all assets that may readily be converted into cash.

Net Demand Liabilities

It works similarly to your checking and savings accounts, from which you can
withdraw funds at any moment.

Time Liabilities

It’s similar to your Fixed Deposit Bank Accounts, where you can’t take your
money right away but must wait a specific amount of time.

Objective

• To check the expansion of bank credit.

• To ensure the solvency of commercial banks.
• To compel banks to invest in government securities like bonds.
• To fuel growth and demand; this is done by decreasing the SLR so
that there is more liquidity with the commercial banks.

Advantages of SLR

Banks maintain SLR due to the following advantages:

iv. The SLR ensures that banks have a certain level of liquid
assets that they can use to meet customer withdrawals or
other obligations.
 v. By requiring banks to hold a certain percentage of their
liabilities in liquid assets, the SLR promotes financial
stability and reduces the risk of bank failure.
vi. The SLR can be used to control credit growth in the
economy. When the SLR is high, banks have less money
to lend, which can help control inflation.

Disadvantages of SLR

1. Limits Lending: A high SLR can limit the amount of

money that banks have available for the purpose of
lending, which can slow economic growth.
2. Reduces Bank Profits: Assets that are held as part
of the SLR often earn lower returns than other
investments, which can reduce bank profits.
vii. Can Cause Liquidity Problems: If the SLR is too high, it
can cause liquidity problems for banks, especially during
times of financial stress.

NABARD

NABARD is a development bank focussing primarily on the rural sector of the

country. It is the apex banking institution to provide finance for Agriculture and
rural development. Its headquarter is located in Mumbai, the country’s financial
capital. It is responsible for the development of the small industries, cottage
industries, and any other such village or rural projects. It is a statutory body
established in 1982 under Parliamentary act-National Bank for Agriculture and
Rural Development Act, 1981.

Functions

The main functions of NABARD are

(i) To grant long-term loans to the State Government for

subscribing to the share capital of cooperative societies.
(ii) To take the responsibility of inspecting cooperative banks,
Regional Rural Banks (RRBs) and primary cooperative
societies.
(iii) To promote research in agriculture and rural development.
(iv) To serve as a refinancing agency for the institutions providing
finance to rural and agricultural development.
 (v) To help tenant farmers and small farmers to consolidate their
landholdings.

Structure of nabard

- Board of Directors

NABARD’s affairs are governed by a Board of Directors. The Board of Directors

are appointed by the Government of India in consonance with NABARD Act. It is
constituted of following:

. The Chairperson,

. 3 directors from amongst experts in

.Rural economics,

. Rural development,

.Village and cottage industries,

.Small-scale industries,

.Or persons having experience in the working of co-operative banks,

regional rural banks or commercial banks,

.Or any other matter the special knowledge or professional experience

which is considered by the Central Government as useful to the National Bank,

.3 directors from out of the directors of the Reserve Bank,

.3 directors from amongst the officials of the Central Government,

.4 directors from amongst the officials of the State Government,

.Such number of directors elected in the prescribed manner, by

shareholders other than the Reserve Bank, the Central Government and other
institutions owned or controlled by the Central Government,

.The Managing Director,

The Chairperson and other directors (except elected ones by share-holders and
officials of the Central Government) shall be appointed by the Central
Government in consultation with the RBI.

- Executive Committees

The Board of Directors may constitute an Executive Committee consisting of

such number of directors (called Executive Director) as may be prescribed.

The Executive Committee shall discharge such functions as may be prescribed

or may be delegated to it by the Board.

Internet Banking

Internet banking, also known as online banking, e-banking or virtual banking, is

an electronic payment system that enables customers of a bank or other
financial institution to conduct a range of financial transactions through the
financial institution’s website. It is a digital method to conduct banking
transactions by the means of the internet, it is a time savvy facility offered by
all standard banks. Individual can conduct banking activities from home through
their smartphones, tablets, laptops and desktops. Net banking is a 24*7 facility
which facilitates checking account balance, making fund transfer, managing
debit and credit cards, opening fixed deposit and recurring deposit account,
paying bills, doing online shopping, ordering chequebooks, buying general
insurance, and much more.

Advantages of Internet Banking

The advantages of internet banking are as follows:

Availability: You can avail the banking services round the clock throughout the
year. Most of the services offered are not time-restricted; you can check your
account balance at any time and transfer funds without having to wait for the
bank to open.

Easy to Operate: Using the services offered by online banking is simple and
easy. Many find transacting online a lot easier than visiting the branch for the
same.
Convenience: You need not leave your chores behind and go stand in a queue
at the bank branch. You can complete your transactions from wherever you are.
Pay utility bills, recurring deposit account instalments, and others using online
banking.

Time Efficient: You can complete any transaction in a matter of a few minutes
via internet banking. Funds can be transferred to any account within the
country or open a fixed deposit account within no time on netbanking.

Activity Tracking: When you make a transaction at the bank branch, you will
receive an acknowledgement receipt. There are possibilities of you losing it. In
contrast, all the transactions you perform on a bank’s internet banking portal
will be recorded. You can show this as proof of the transaction if need be.
Details such as the payee’s name, bank account number, the amount paid, the
date and time of payment, and remarks if any will be recorded as well.

Disadvantages of Internet/Online Banking

The disadvantages of internet banking are as follows:

Internet Requirement: An uninterrupted internet connection is a foremost

requirement to use internet banking services. If you do not have access to the
internet, you cannot make use of any facilities offered online. Similarly, if the
bank servers are down due to any technical issues on their part, you cannot
access net banking services.

Transaction Security: No matter how much precautions banks take to provide a

secure network, online banking transactions are still susceptible to hackers.
Irrespective of the advanced encryption methods used to keep user data safe,
there have been cases where the transaction data is compromised. This may
cause a major threat such as using the data illegally for the hacker’s benefit.

Difficult for Beginners: There are people in India who have been living lives far
away from the web of the internet. It might seem a whole new deal for them to
understand how internet banking works. Worse still, if there is nobody who can
explain them on how internet banking works and the process flow of how to go
about it. It will be very difficult for inexperienced beginners to figure it out for
themselves.

Securing Password: Every internet banking account requires the password to be

entered in order to access the services. Therefore, the password plays a key
role in maintaining integrity. If the password is revealed to others, they may
utilise the information to devise some fraud. Also, the chosen password must
comply with the rules stated by the banks. Individuals must change the
password frequently to avoid password theft which can be a hassle to remember
by the account holder himself.

Fixed deposit account

A fixed deposit, also known as an FD, is an investment instrument offered by

banks, as well as non-banking financial companies (NBFC) to their customers to
help them save money. With an FD account, you can invest a sizeable amount
of money at a predetermined rate of interest for a fixed period. At the end of
the tenure, you receive the lump sum, along with an interest, which is a good
money-saving plan. Banks offers different rates of interest for a fixed deposit
account.

You can choose a fixed deposit for a period ranging from minimum 7-14 days to
maximum 10 years. This is why an FD is sometimes called a term deposit.
When you open a fixed deposit account at a specific interest rate, it is
guaranteed, for the rate of interest remains the same, irrespective of any
changes, which happen due to market fluctuations.

The Interest you earn is either paid at maturity or on periodic basis depending
on your choice. You are not allowed to withdraw the money before the maturity.
If you want to, you have to pay a penalty.

Features of a Fixed Deposit

To know what is a fixed deposit clearly, you need to know its prime features.
Here are the significant ones:

1. Assured Returns

The returns of a fixed deposit are guaranteed. You will get the same return
agreed at the time of opening an FD. This is not the case with market-led
investments, which offers returns based on the fluctuations of interest rates in
the market. You will receive the same interest that was agreed to you, even if
the interest rates fall. This makes the fixed deposit more secured than any
other investments.

2. Rate of Interest
The interest rate on a fixed deposit varies depending on the term you choose.
However, the rate of interest is fixed. If you want to know the current FD
interest rates, you can visit the IDFC FIRST Bank website here.

3. Offers Flexible Tenures

You can choose the tenure from 8 days to 10 years for an FD with the IDFC
FIRST Bank. If you want to open an FD account, click here.

viii. Return on Investment

The interest you earn on the fixed deposit depends on the maturity period or
tenure of the FD. With a higher tenure, you earn a higher interest. Moreover,
the returns you get on your investment depends on whether you opt for
receiving the interest periodically or reinvesting the interest, which is called a
cumulative FD. You gain the benefit of compounding with this FD. You can
calculate your fixed deposit interest with the IDFC FIRST Bank FD calculator
here.

ix. Loan against FD

You can avail a loan against your fixed deposit in case you are in urgent need of
funds. This saves you from closing your FD prematurely.

Letter of Credit

Letter of document issued by a bank or financial institution that guarantees

payment to a specific individual or company, provided certain conditions are
met. The document is usually used in international trade to ensure that the
buyer is able to pay the seller for goods or services they have received.

It is also known as a documentary credit.

How Does a Letter of Credit Work?

A letter of credit is a payment mechanism used in international trade

transactions. It is a document issued by a bank on behalf of a buyer that
guarantees to the seller that the buyer will pay for the goods or services on
time and in the agreed-upon amount.
➡️The process starts when the buyer applies for it from their bank.

➡️The bank then reviews the creditworthiness of the buyer and, if approved,
issues the letter of credit.

➡️It is then sent to the seller’s bank, which verifies the contents of the letter of
credit and the buyer’s ability to pay.

➡️The seller then ships the goods or provides the services.

➡️Once the buyer’s bank receives proof that the goods or services have been
shipped or provided, the buyer’s bank pays the seller’s bank the amount
specified in the letter.

➡️The seller’s bank then forwards the money to the seller, minus any applicable
fees. The buyer then pays their bank the amount due.

Importance of Letter of Credit in int. trade

It is a document issued by a bank that guarantees payment to a seller in the

event that a buyer fails to pay for goods or services.

➡️A letter of credit provides security to both parties in a transaction, as it

ensures that payment will be made as long as the terms of the letter of credit
are met.

➡️This reduces the risk of fraud or non-payment and encourages buyers and
sellers to do business without fear of non-payment.

➡️It also establishes trust between the parties involved in the transaction, as
they know that the bank will ensure that payment is made in the event of a
dispute.

➡️The use of it can also reduce the time and cost associated with international
transactions, as the document eliminates the need for third-party
intermediaries.

What are the Types of Letters of Credit

Let’s have a closer look at the types of letters of credit.

 i. Revocable Letter of Credit

This can be amended or cancelled at any time by the issuing bank without
informing the beneficiary.

ii. Irrevocable Letter of Credit

This cannot be amended or cancelled without the agreement of all parties

involved.

iii. Standby Letter of Credit

This is a guarantee from a bank to a buyer that the seller will fulfil their
obligations under a contract.

b. Confirmed Letter of Credit

This is a guarantee from two banks, one of which is usually the seller’s bank,
that the seller will fulfil their obligations under a contract.

2. Transferable Letter of Credit

A transferable letter of credit allows the beneficiary to transfer all or part of the
credit to a third party.

Para banking activities

Para-banking activities refer to a range of financial services that are provided by

entities other than traditional banks. These activities are often performed by
non-banking financial companies (NBFCs) or other financial intermediaries.
While these entities are not licensed as banks, they offer services that are
similar to those provided by banks, albeit with certain limitations and regulatory
frameworks.

Some common para-banking activities include:

Non-Banking Financial Companies (NBFCs): NBFCs provide various financial

services such as loans, credit facilities, investment services, and asset financing.
They typically target niche markets or underserved segments of the population.
NBFCs play an important role in providing credit to small and medium-sized
enterprises (SMEs) and individuals who may not meet the stringent
requirements of traditional banks.

Microfinance Institutions (MFIs): MFIs offer small loans, savings, and other
financial services to low-income individuals or groups who do not have access to
formal banking services. Microfinance plays a crucial role in poverty alleviation
and empowering marginalized communities by providing them with financial
tools and resources.

Housing Finance Companies (HFCs): HFCs specialize in providing loans for

purchasing or constructing residential properties. They play a significant role in
the real estate sector by offering housing loans at competitive rates, facilitating
home ownership for a broader section of the population.

Leasing and Hire-Purchase Companies: These companies provide equipment

leasing and hire-purchase services, allowing businesses and individuals to
acquire assets such as vehicles, machinery, or office equipment without
incurring the upfront costs of purchasing them outright.

Mutual Funds: Mutual funds pool money from multiple investors and invest in a
diversified portfolio of securities, such as stocks, bonds, or money market
instruments. They offer investors the opportunity to participate in the financial
markets with relatively small amounts of money, providing diversification and
professional management of investments.

It Is important to note that while para-banking activities provide valuable

financial services and contribute to economic growth, they are subject to
specific regulations and supervision to protect the interests of consumers and
maintain financial stability. Regulatory authorities establish guidelines and
oversight mechanisms to ensure that para-banking entities operate in a prudent
and transparent manner.

BR act

The Banking regulation 1949 act of India is one of the legislative authorities of
India. It is a single body that controls the cooperative and commercial banks of
India. The Banking Regulation Act, 1949 of India was essentially established to
regulate all the banks of India. The Act has been divided into five parts
comprising 56 sections.

The objectives of the Banking Regulation Act are stated below:

 • To meet the demand of the depositors and provide them security
and guarantee.
• To provide provisions that can regulate the business of banking.
• To regulate the opening of branches and changing of locations of
existing branches.
• To prescribe minimum requirements for the capital of banks.
• To balance the development of banking institutions.

The main features/importance of the Act are mentioned below:

• Non-banking companies are forbidden to receive money deposits

that are payable on demand.
• Non-banking risks are reduced by prohibiting trading by banking
companies.
• Maintaining minimum capital standards.
• Regulation on the acquisition of shares of banking companies.
• Power of the Central Government to make schemes for the banks.
• Provisions regarding liquidation proceedings for banking companies.

Employment of funds

The employment or investment of funds by a commercial bank means the safe

utilization and profitable use of its funds. The bank obtains money from
different sources and pays interest on them. It is the utmost desire of every
commercial bank that it should invest its funds in a manner which serves its
own as well as customer’s interest. Its own interest is to earn profit for the
shareholders. The other interest is of the customers along with interest as and
when demanded by them. These two objectives of liquidity and profitability are
obtained by utilizing the surplus funds into ready convertible securities. The
main types of earning assets of a bank are different which is money including at
short notice, investment in government and semi government securities.

Public deposits are a powerful source of funds of banks. There are three types
of the banks a deposit one is current deposits, second is saving deposits and the
third one is time deposits. Due to the spread of literacy, banking habits and
growth in the volume of business operations there is marked increase in deposit
money with banks. So the main mainly makes its investments in the other
countries of the world.

EMPLOYMENT OR ADVANCING FUNDS :-

 The main business of the commercial bank is to obtain money from the
customer and invest this money. Bank earns the profit and pays interest to the
customers from this profit. So it keeps in view its own interest and also the
customer, so there are two objectives :

e. It earns the profit for the customers.

f. Ii. To meet the demand of the customers it should keep
sufficient cash.

So profitability and liquidity are two main objectives.

A bank provides loans to the companies, firms and individuals. So major

function is that it should advance the loans. But lending of money is very risky.
Before advancing the loans keeps in view some precautions or principles.

These are following :

a. Profitability :- It is the major objective in the

banking business. Bank can earn maximum
profit by investing its deposits in securities
yielding height returns while advancing the
loans this factor is considered by the banker.
2. Liquidity :- If assets in a short time with
minimum cost is called liquidity. It is the basic
principle for investing the funds before the
banker. If the investment is not liquid then
bank will fail to meet the demand of its
depositors. So every bank tries to invest the
funds in to ready convertible securities. 3.
Ability To Repay :- It is the most important
principle for Investing funds. The bank keeps
in view the borrower ability to repay the debt
before lending the money. Character goodwill
and business integrity of the borrower must
be checked. 4. Productive Purpose :- A
banker should advance the loan for productive
purpose. It will be very secure and definite
source of repayment. Unproductive loans
must be discouraged. It is observed that short
term productive loans are very ideal. 5.
Reasonable Security :- While advancing the
loan a banker secures loan by getting
reasonable security from the borrower. It is
called insurance against the risk of non
 repayment. The security offered against loan
must be adequate and it can be disposed off
without a loss and delay. 6. Ready Cash :- A
bank must keep the ready cash to meet the
demand of the depositors. Any particular limit
can be fixed keeping in view the daily
experience. 7. Advance Distribution :- In
case of lending there is a risk of loss every
time, so it is better that loan may not be
given to any single particular area. It may be
given to large number of borrowers over a
large number of areas. It minimizes the risk.
8. Preference To National Interest :- The bank
must keep in view the policy of the state. If
Govt. asks to provide loan to the agriculturist
and small business, it should not be ignored
it.

Banks deal mainly with money and credit. They are manufacturers of money.
Industrial and economic evolut ion would not have occurred in the absence of
banks. They play significant role in the shaping and in the advancing of modern
societies. They distribute the funds equitably, reduce cyclical fluctuations. The
industrial development will not be possible with out the help of the banks. They
purchase and sell money and credit. Creation of credit is a special function of
banks. They are the architecture of the digital economy. They encourage trade
and industry. The functions are the main income sources of money . Every bank
must follow these functions. The basic functions of a bank are (1) Accepting of
Deposits (2) Advancing of Loans (3) Secured Advances.

DISHONOUR OF CHEQUE

Cheque meaning

A cheque is said to be honoured, if the banks give the amount to the payee.
While, if the bank refuses to pay the amount to the payee, the cheque is said to
be dishonoured. In other words, dishonour of cheque is a condition in which
bank refuses to pay the amount of cheque to the payee.

NOD meaning
Notice of dishonour means information about the fact that the instrument has
been dishonoured.

Notice of dishonour is given to the party sought to be made liable and, therefore
it serves as a warning to the person to whom the notice is given that he could
now be made liable.

Enormous delay in giving notice of dishonour may put an end to the plaintiff’s
right in respect of the dishonoured instrument.

Notice of dishonour is to be given by a person who wants to make some prior

party of his liable on the instrument. Therefore, such a notice may be given:

i. Either by the holder

b. A party to the instrument who remain liable
for it

Grounds for dishonor of cheques

Pg 624 book

Pg 654-657

CLS

M/s. Dalmia Cement (Bharat) Ltd. V. M/s.Galaxy Traders & Agencies Ltd. & Ors.

The Supreme Court basing its judgement on the existing facts said that Section
138 of the Act has been made keeping in concern any kind of infringement of
legal right of the person whose payment has not been issued and therefore if
any such situation arises which will make it impossible for the person to get the
payment then in such case, the section should function the way it has been laid
down to keep the objective of the Act. Thus, in this case, the court ordered
actions to be carried out against the respondent as laid down in the Act.

Canara Bank v. Canara Sales Corporation

The Court highlighted that there was negligence on the part of both the creditor
as well as the debtor but the beam balance of negligence weighed more for the
banker than the company. Thus, mere negligence on the part of the bank
cannot be a ground for not using the same. The court finally ruled that the
company is eligible for compensation thereby dismissing the case.

M/s Meters and Instruments Private Limited & Anr. V. Kanchan Mehta

The Supreme Court passed a verdict saying that whatever offences have been
laid down in Section 138 are civil by nature. Further, the provision of
compoundable offence is present in Negotiable Instruments (Amendments and
Miscellaneous Provision Act), 2002 which does require the consent of both the
parties in concern. In the present case, as the company was willing to
compensate the complainant, the court in the sake of proper delivery of justice
thought of discharging the accused for the complainant was compensated with
the amount that was necessary to be provided with.

Dayawati v. Yogesh Kumar Gosain

The Delhi High Court’s decision in 2017 opened the door to a new avenue
known as the alternate dispute resolution mechanism for deciding crimes
classified under Section 138 of the Act that is criminally compoundable by
nature.

Dashrath Rupsingh Rathod v. the State of Maharashtra & Anr

Because of the above-mentioned groundbreaking Supreme Court decision, the

foundational standard for filing criminal complaints about cheque dishonour
under Section 138 of the Negotiable Instruments Act, 1881 has been altered.
Initially, a case under Section 138 could only be brought by the person who
received the cheque at his or her business premises or residential, but this has
changed. According to the above-mentioned verdict, the complaint must be filed
in the county where the branch of the bank on which a cheque was drawn is
situated, and the judgment will be applied retroactively, i.e., lakhs of cases
currently pending in numerous courts across the nation will be subjected to an
interstate transfer of cheque bouncing cases and dishonouring of cases under
the verdict.

Nishant Aggarwal v. Kailash Kumar Sharma

The SC held that issuance of notice alone was not sufficient and that
communication of the same was mandatory. Also, only after the notice has been
served and there has been a failure of payment within the next 15 days, can the
offence under section 138 be said to be completed.