Introduction to Banking. Mishu Tripathi. History of Banking in India-Phase I. Three presidency banks were established in Calcutta (1806) in Bombay (1840) and in Madras (1843)
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During the period 1900 to 1925 many banks failed, and hence a Central Banking Enquiry Committee formed in 1929 to trace the reasons for the failure of such banks.
In 1969 the Government of India nationalised 14 major commercial banks having deposits of Rs.50 crore or more
*Time is more important than money
If the purpose of accepting of deposit is not to lend or invest, the business is not called banking business.
The money so accepted is repayable on demand.
The money so deposited can be withdrawn by the approved modes as specified by bank.
Accepting deposits is the prime function of a commercial bank.
They generally accept 3 types of deposits
In fact bank charges incidental charges depending on the volume of transactions, which was earlier, calculated on the basis of number of folios used.
11. Government and Semi-Government Bodies, Local Authorities etc.
to all customer accounts. It deals with not
only to identify the customer but also
to understand the activities of the customer,
to ensure that the operations in the customer
account/s is/are for genuine purpose
The main rules are –
There is a restriction for maintaining minimum balance in the account, which is fixed at the discretion of the bank.
The balance can be withdrawn by issuing cheques or one can have ATM/Debit Card.
If the depositor wants funds for short term, temporarily or the maturity of deposit is just near, he can opt for a loan against the security of such deposit.
Loans may be fund based or non-fund based (wherein bank guarantee or LC is issued)
Loans given by the banks are classified as secured, unsecured or partly secured.
Examples of unsecured loans are:
In the case of unsecuredloans the banker relies on the credit worthiness of the borrower and take one or more guarantor to ensure safety of the advance.
Bankers generally do not finance the full amount of the asset to be purchased but asks the borrower to bring a margin which varies from 10 to 15% depending on the type of security and the credit worthiness of the borrower.
On the other hand if ‘B’ starts manufacturing and later on ‘A does not take delivery and does not pay, ‘B’ will suffer a great loss.
To mitigate the problem the exporter will request the importer to send a letter of credit from a reputed bank who will guarantee payment if the export is made and all the conditions governing the export is complied with.
Systematic study of various factors shall help a banker in working out the feasibility of the project and evaluating credit worthiness of the borrower although the risk can never be fully eliminated in lending.
Under these five heads we shall examine various other aspects related to them.
The foremost and the most important aspect of appraisal is the man behind the scene i.e., the management.
In the absence of past record one has to see other traits of a borrower like frankness, reasonableness, patience, attitude towards risk and other entrepreneurial qualities.
In the era of competition the evaluation of the earning process and projections is not very reliable and the tendency to depend merely on the analysis of financial statements may not be free from risk unless supplemented by managerial competence.
Capital: What is the owner’s stake in the business?
Capital indicates the financial resources available at the borrower’s end. From the banker’s point of view these resources can be classified into three divisions, namely, margin, principal security and collateral.
No banker should begin with hypothesis that the repayment of loans shall come by the sale of collateral; rather it should come out of the generation of surplus.
This head include not only availability of raw material but also other infrastructural facilities like skilled labour, power or fuel, water, transport facilities, appropriate technology and proper location.
There is no dearth of unskilled labour in any part of the country. But some enterprises require highly skilled labour, which may not be available at all places.
Availability of power and fuel is very much essential for certain enterprises and in some industries the requirement is uninterrupted power.
Certain enterprises like chemical unit or a tannery require abundant supply of water.
The financial statements of the earlier years shall reveal the trends of sales, i.e., whether they are stagnant, increasing or decreasing. Increasing accumulation of finished goods every year may also indicate low saleability unless otherwise explained for.
But if the project is well planned it will reach the growth stage during which the sales will grow very rapidly and an increased plant capacity will be utilized.
Once the installed capacity is fully utilized, the enterprise may move to the maturity stage where the sales shall become stagnant, as they cannot be increased in spite of existing demand.
Besides examining the present marketing position of the product, the possible future market potential should also be examined.
The money is required for two purposes, i.e., to acquire capital assets, and to meet working capital requirements.
The financial requirements for these two purposes can be partly met by own investment in the form of capital together with reserve funds, if any, and partly by loans and advances from institutional as well as non-institutional sources.
For acquiring capital assets, either long term or medium term loans may be required. These are called term loans.
For working capital purposes, loans are required for a short duration. It is called working capital facilities.
The banks because of their maturity pattern of deposits, which are mostly payable on demand and even there is provision for premature withdrawal of term deposits, prefer to grant working capital finance in the form of:
6. Non-fund based facilities in the form of letters of credit and bank guarantees.
7. Export finance in the form of pre shipment credit and post shipment credit.
10. Sale of third party products – Mutual fund schemes/insurance
11. Safe Custody
12. Safe deposit vault
13. Depository Services
14. Tax payments on-line
15. Counseling Services
With a view to adding value to banking services and making available the numerous benefits of depository system to clients, banks in India offer Demat services through either Depositories viz. National Securities Depository Limited (NSDL) or Central Depository Services (India) Ltd. (CDSL) or both by becoming a sub-participant.
The following are the usual objectives of counseling services provided by some banks.