Primary deposit and derivative deposit

Primary deposit and derivative deposit Primary deposit is the initial deposit made by the depositors in the bank. Secondary deposit or derivative deposit is the deposit of credit created by the bank to the borrower while lending loan.

Modern functions of commercial banks & The principles of commercial banking

Modern functions of commercial banks:

·         Phone banking

·         Issue of debit/credit cards

·         Net banking

·         Bancassurance which is selling of insurance using banking channels.

·         Offering the ATM facility

·         SMS alerts

·         Rail and air ticket reservation

·         NEFT (National Electronic Fund Transfer) and RTGS (Real Time Gross Settlement).

The principles of commercial banking are the principles of:

·         Liquidity

·         Profitability

·         Solvency

·         Safety

·         Collection of Savings

·         Loans and Investment Policy

·         Economy

·         Providing services

·         Secrecy

·         Modernization

·         Specialization

·         Location

·         Relations

·         Publicity

Functions of commercial banking

Functions of commercial banking

Functions of commercial banking

§  Principal / Primary / Basic / Fundamental functions

§  Receiving of deposits:-

o   Current accounts / Demand deposits / Demand liabilities

o   Saving bank account

o   Fixed deposit account / Time deposits / Time liability

o   Recurring deposit account

o   Home safe account / Money box Scheme

§  Lending of funds

o   Loans

o   Cash credits

o   Overdrafts

o   Discounting of bills

§  Investment of funds on securities

§  Credit Creation

§  Subsidiary / Secondary / Supplementary / Ancillary functions

§  Agency services

o   Collection of money on behalf of customers

o   Making  Payment on behalf of customers

o   Purchase and sale of securities on behalf of customers

o   Advising customers regarding stock exchange investment

o   Acting as Trustee, Executer or Attorney of customers

o   Serving as correspondents and representative of customers

§  Miscellaneous / General utility services

o   Safe custody of valuables

o   Issuing of Travelers ‘letter of credit, and Travelers Cheques

o   Acting as a Referee

o   Collection of statistics and Data.

§  Principal / Primary / Basic / Fundamental functions

§  Receiving of deposits:-

o   Current accounts / Demand deposits / Demand liabilities

o   Saving bank account

o   Fixed deposit account / Time deposits / Time liability

o   Recurring deposit account

o   Home safe account / Money box Scheme

§  Lending of funds

o   Loans

o   Cash credits

o   Overdrafts

o   Discounting of bills

§  Investment of funds on securities

§  Credit Creation

§  Subsidiary / Secondary / Supplementary / Ancillary functions

§  Agency services

o   Collection of money on behalf of customers

o   Making  Payment on behalf of customers

o   Purchase and sale of securities on behalf of customers

o   Advising customers regarding stock exchange investment

o   Acting as Trustee, Executer or Attorney of customers

o   Serving as correspondents and representative of customers

§  Miscellaneous / General utility services

o   Safe custody of valuables

o   Issuing of Travelers ‘letter of credit, and Travelers Cheques

o   Acting as a Referee

o   Collection of statistics and Data.

structure of commercial banking / Commercial banking system:

Origin of the Term ‘Bank’

The English term ‘Bank’ is derived from-

The Italian word ‘banco’ The Latin word ‘bancus’ The Greek word ‘banque’ or The French word ‘banque’	Which means a bench
The German word ‘banc’ / ‘banck’	Which means a joint stock / common fund (heap of money)

Classification of commercial banking on the basis of structure of commercial banking

/ Commercial banking system:

§  Group banking / Holding company banking:-  Group banking  is a system under which a group of banks separately incorporated are bought under the control of a holding company.

§  Chain banking:-  it is a system under which  a number of separately incorporated banks are brought under common control by a device other than holding company, say, through a group of persons purchasing share and controlling a number of independent banks or through inter-locking of directors.

§  Correspondent banking system:- it is a system under which units banks are linked with big correspondent banks.

§  Branch Banking / Delocalized banking:- an individual bank carries on banking business with a network of branches spread all over the country.

§  Unit banking / Localized banking:- it is a system under which an individual bank carries on banking business through a single office.

§  Mixed banking:- Commercial banks provide both short term and long term loans. Here bank plays the dual role of commercial banking and industrial banking.

List of Committees Related to Banking & Finance in India

1. Abid Hussain Committee: For Small Scale Industries

2. A C Shah Committee: For Reforms Relating To Non-Banking Financial Companies (NFBC)

3. Aditya Puri Committee: For Dissemination of Credit Information

4. Arvind Mayaram Committee: For giving clear definitions to Foreign Direct Investment (FDI) and Foreign Institutional Investment (FII)

5. Basel Committee: For Banking Supervision

6. Bimal Jalan panel: To scrutinize applications for new bank licenses.

7. Bhandari Committee: For Reconstruction of RRBs

8. Cook Committee: For Capital adequacy of banks.

9. C Rangarajan committee: For poverty scale estimates in the country

10. Damodaran Committee: For improvement of customer services in banks

11. Dave Committee (2000): For Pension Scheme for Unorganized Sector

`12. Deepak Parekh committee: For Financing Infrastructure sector

13. Janakiraman Committee: To investigate the security transactions of the bank

14. Kelkar Committee: For Tax Structure Reforms

15. K M Chandrasekhar committee: For rationalization of foreign investment norms

16. MBN Rao Committee: To prepare the blueprint of India’s first women’s bank

17. Narasimham Committee: For Banking Sector Reforms

18. Nachiket Mor Committee: For comprehensive financial services for small businesses and low-income households.

19. Naresh Chandra committee: For 14 member task force on security issues

20. Pulak Kumar Sinha Committee: To study the feasibility of Aadhaar as an additional factor for authentication of card present transactions

21. Raghuram Rajan Committee: For Financial Sector Reforms

22. R V Gupta Committee: For Small Savings

23. RS Gujral Committee: To Suggest measures to boost MSME exports.

24. Shyamala Gopinath Committee: For Suggestions on Post office small saving schemes

25. S P Talwar Committee: For Restructuring of Weak Public Sector Bank

26. SN Verma Committee (1999): For Restructuring the Commercial Banks

27. Suma Verma Committee: To update, and revise the Banking Ombudsman Scheme, 2006

28. UK Sharma Committee: For NABARD’s Role In RRB

29. Urjit Patel Committee: To examine the current monetary policy framework

30. Vaghul Committee: For Money Market In India

Kerala PSC | Model Questions in banking syllabus | Banking Questions | Banking Syllabus |

What is the full form of CBS?

a. Core Banking Solution

b. Core Banking Software

c. Core Banking System

d. Core Banking Service

What is the full form of SWIFT?
a. Safe Window for Interbank Financial Transactions

b. Safe Window In case of Financial Transaction

c. Society for Worldwide Interbank Financial Telecommunication

d. Safe Window Institute For Transactions

What does the letter 'S' denote in the term IFSC?

a. Subscriber

b. State

c. System

d. Source

e. Standard

Which of the following defines 'Para Banking' services?
a. Eligible financial services rendered by banks

b. Services provided through business correspondents

c. Services provided to armed forces personnel

d. Utility services provided by banks

 What is the full form of NDTL?
a. New Demand & Tenure Liabilities

b. Net Demand & Time Liabilities

c. National Deposits & Total Liquidity

d. Net Demand & Tax Liabilities

First Narasimhan Committee Report – I (1991)

First Narasimhan Committee Report – 1991

Recommendations of Narasimhan Committee

1.    Establishment of 4 tier hierarchy for banking structure with 3 to 4 large banks (including SBI) at the top and at bottom rural banks engaged in agricultural activities.

2.    The supervisory functions over banks and financial institutions can be assigned to a quasi-autonomous body sponsored by RBI.

3.    A phased reduction in SLR & CRR.

4.    Phased achievement of 8% capital adequacy ratio.

5.    Abolition of branch licensing policy.

6.    Proper classification of assets and full disclosure of accounts of banks and financial institutions.

7.    Deregulation of Interest rates.

8.    Competition among financial institutions on participating approach.

 Banking Reform Measures of Government: –

On the recommendations of Narasimhan Committee, following measures were undertaken by government since 1991: –

1.    Lowering SLR and CRR

·         The high SLR and CRR reduced the profits of the banks. The SLR had been reduced from 38.5% in 1991 to 25% in 1997.

·         The Cash Reserve Ratio (CRR) is the cash ratio of banks total deposits to be maintained with RBI. The CRR had been brought down from 15% in 1991 to 4.1% in June 2003.

2.    Prudential Norms: –

·         Prudential norms have been started by RBI in order to impart professionalism in commercial banks. The purpose of prudential norms includes proper disclosure of income, classification of assets and provision for Bad debts so as to ensure that the books of commercial banks reflect the accurate and correct picture of financial position.

·         Prudential norms required banks to make 100% provision for all Non-performing Assets (NPAs).

3.    Capital Adequacy Norms (CAN): –

·         Capital Adequacy ratio is the ratio of minimum capital to risk asset ratio. In April 1992 RBI fixed CAN at 8%. By March 1996, all public sector banks had attained the ratio of 8%. It was also attained by foreign banks.

4.    Deregulation of Interest Rates

·         The Narasimhan Committee advocated that interest rates should be allowed to be determined by market forces. Since 1992, interest rates have become much simpler and freer.

·         Scheduled Commercial banks have now the freedom to set interest rates on their deposits subject to minimum floor rates and maximum ceiling rates.

·         The interest rate on domestic term deposits has been decontrolled.

·         The interest rates on deposits and advances of all Co-operative banks have been deregulated subject to a minimum lending rate.

5.    Recovery of Debts

·         The Government of India passed the “Recovery of debts due to Banks and Financial Institutions Act 1993” in order to facilitate and speed up the recovery of debts due to banks and financial institutions. Six Special Recovery Tribunals have been set up. An Appellate Tribunal has also been set up in Mumbai.

6.    Competition from New Private Sector Banks

·         Banking is open to the private sector.

·         New private sector banks have already started functioning. These new private sector banks are allowed to raise capital contribution from foreign institutional investors up to 20% and from NRIs up to 40%. This has led to increased competition.

7.    Access To Capital Market

·         The Banking Companies (Acquisition and Transfer of Undertakings) Act was amended to enable the banks to raise capital through public issues. This is subject to the provision that the holding of Central Government would not fall below 51% of paid-up-capital.

8.    Freedom of Operation

·         Scheduled Commercial Banks are given freedom to open new branches and upgrade extension counters, after attaining capital adequacy ratio and prudential accounting norms. The banks are also permitted to close non-viable branches other than in rural areas.

9.  Local Area Banks (LABs)

·         In 1996, RBI issued guidelines for setting up of Local Area Banks, and it gave Its approval for setting up of 7 LABs in private sector. LABs will help in mobilizing rural savings and in channelling them into investment in local areas.

10.  Supervision of Commercial Banks

·         The RBI has set up a Board of financial Supervision with an advisory Council to strengthen the supervision of banks and financial institutions. In 1993, RBI established a new department known as Department of Supervision as an independent unit for supervision of commercial banks.