1. How did the commercial banking system grow in India ?
Ans- To understand the history of modern banking in India , money lenders and Indigenous bankers are the main founder of commercial banking in India . One has to refer the English agency houses was established by the East India Company . These agency houses were basically as part of their main business . It appears that the earliest bank on western time was established at Madras in as early as 1683.
The East India company laid the function for modern banking in the first half of the 19th century with the establishment of the following three banks -
(a) Bank of Bengal (1806)
(b) Bank of Bombay (1840)
(c) Bank of Madras (1843)
These banks are popularly known as presidency banks. The banking business of agency banks which survive and continued to carry on trade and banking business together was progressively taken over by presidency banks .
Imperial Bank of India - These three presidency banks were amalgamated and form a new bank. These banks is called Imperial Bank of India which was brought into existence on 27th January , 1921, by the Imperial Bank of India Act was passed in the year 1920 .
RBI- Though the Imperial Bank of India perform certain banking functions but the right of note issue was not given to Imperial Bank by government . Thus at that time the functions of note issue was performed by the Govt. of India and the functions of credit control was performed by the Imperial Bank of India . In 1931, Central Banking inquiry committee also recommended for setting up of a Central Bank of India . As a result of all these recommendation and suggestion , a fresh bill was introduce in 1933 in assembly and the act was passed in the year 1934 the RBI was established in 1st April 1935 . On 1st January 1949 RBI was nationalised under Reserve Bank Act.
State Bank of India - SBI was established under the RBI act 1965 by nationalising the Imperial Bank of India . It came into existence on July 1, 1955 . It was the biggest commercial bank in India . The main objective of the establishment of the State Bank of India are -
1. To extend banking facilities on a large scale, particularly in the rural and semi urban areas .
2. To promote agricultural finance and to remove the defects in the system of agricultural finance.
3. To help the Reserve Bank in implementation its credit policies .
4. To help the government in implementing its broad economic policies .
2. Explain the main functions of SBI / Public Sector Bank ?
Ans- 1. Agent of the Reserve Bank - The SBI act as an agent of the Reserve Bank of India at any place of the country where there are no branches of the banking department of the RBI .
2. Accepting Deposits - It is the most important function of SBI . Banks mainly depends on the funds deposited from the general public. This banks collect money from those people who have surplus money .
3. Advancing Loans - The SBI advances and sends money to general public against the security of stocks, debentures , Bills Of Exchange etc.
4. Investment - The investment of fund of SBI are normally invested in different securities /share of different companies . These investment are easily converted into money or cash .
5. Remittance of fund - It is an important function of SBI and through this function banks transfer their funds from one place to another .
6. Agent of the Government - They also act as an agent of the Central Government and State Government also. SBI helps in implementing any schemes for financing the construction of different enterprises on behalf of the government .
7. Dealing in foreign exchange - The SBI serve as a major authorise dealer of foreign exchange in the country . It also finance the foreign trade of the country .
8. Dealing in gold or silver - The SBI also helps in gold and silver . They purchase gold and silver from the public and sale this gold and silver to the public on demand .
3. What are the objectives behind the nationalisation of commercial banks ?
Ans - At present 19 Commercial Banks were operating in India . The important objectives of bank nationalisation are as follows -
1. To mobilize savings of people to the largest possible extent and to utilise them for productive purposes.
2. To actively foster the growth of new and progressive entrepreneur and create fresh opportunities for neglected or backward areas of the country .
3. To meet the credit needs of small private sector industries and less sector industries .
4. To curve / the use of bank credit for speculative and other unproductive purposes .
5. To expand the branch network of banks in all over the bank staff .
4. Explain the classification of commercial banks?
Ans- In India , commercial banks are classified on the basis of two criteria :
(a) On the basis of statutory , there are two types of commercial bank: scheduled and non- scheduled banks .
(b) On the basis of ownership banks may be classified into two group- public sector commercial banks and private sector commercial banks .
5. State the meaning of scheduled commercial bank ?
Ans - Scheduled banks are those commercial banks which are included in Second Schedule of the Reserve Bank of India Act , 1934.
Under Sections 42(6) of Reserve Bank of India Act, baking institution can claim for its name being included in the schedule if ,
(a) It satisfies RBI that its affairs are not being conducted in a manner detrimental to interests of its depositors and
(b) Its paid-up capital and reserves have an aggregate value of not less than Rs 5 lakhs .
6. Write an note on Non - Scheduled bank ?
Ans - Non- Scheduled banks are those banks whose names do not appear in the list of scheduled banks maintained by Reserve Bank. In recent years , non - scheduled banks have almost vanished from banking scene of our country . These banks do not exist from June 30, 2000 onwards.
7. What are the differences between scheduled and non- scheduled banks ?
Ans - The differences between scheduled banks and non-scheduled banks are that scheduled banks are included in Second Schedule to Reserve Bank of India Act, whereas non- scheduled banks do not appear in the list of scheduled banks maintained by Reserve Bank.
The number of scheduled banks is increasing day by day but the number of non-scheduled banks have almost vanished form banking scene of our country .
8. What do you mean by Public Sector Bank ?
Ans- Public Sector Banks are owned and controlled by government . In India, nationalised banks are owned and regional rural banks are public sector banks .
Government of India , established State Bank of India in 1955 as the first public sector commercial bank . The expansion of public sector in banking field began with nationalisation of 14 major commercial banks on July 19,1969 . In 1980 , six more private sector banks having deposits of above Rs. 200 crores were nationalised . The nationalised banks undertook a massive expansion programme, leading to a country -wide spread of banking facilities .
9.What is meant by Private Sector Banks ?
Ans- Private Sector Banks are owned by private individuals or corporations and not by government or co-operative societies .
These banks played a strategic role in growth of joint stock banks in India . In 1951, there were 566 private sector banks out of which 474 were non -scheduled and 92 were scheduled . But , public sector commercial bank was not present at that time . Gradually , number of private sector banks decreased . In 1969 , there were only 67 private sector banks .
10. Write four differences between public sector and private sector banks ?
Ans - Following are differences between private and public sector banks -
1. Ownership - Private sector banks are owned by private individuals or corporations, whereas public sector banks are owned and controlled by government .
2. Number - Number of private sector banks is decreasing whereas number of public sector banks is increasing .
3. Objective - Profit making is the sole objective of private sector banks . But objective of public sector banks is both profit-making and socio-economic development .
4. Classification - Private sector banks are classified into Indian Banks and foreign banks . On the other hand , public sector banks are classified into state bank group and nationalised banks .
11. Give arguments for and against bank nationalisation ?
Ans - 1. Ownership and control of a few - A few big shareholders control whole working of Indian banking system . They allocate credit according to their own interests . The nationalisation of banks would bring under control of government for meeting general interest of public .
2. Concentration of wealth and power - In pre-nationalisation period banks were controlled by a few big holders which lead to concentration of wealth and power in a few hands .
3. Discrimination against small business - Before nationalisation of banks, Indian banks had adopted a general policy of providing finance to large industries . Thus, small business were discriminated . Nationalisation was favoured to extend financial help to small business .
4. Indifference to agriculture sector - Commercial banks in India ignored agriculture sectors. Most of the banks and their branches existed in urban areas and were catering needs of industry and trade . Nationalisation of banks was hoped to contribute to development of agriculture .
5. Financing economic plans- It was argued that nationalisation of banks would make their resources available to the government for financing economic plan of the country .
12. Briefly explain the 'Lead Bank Scheme '?
Ans- With the nationalisation of 14 banks in 1969 , government took the initiative extending banking system to rural areas and was looking for a scheme of rapid branch expansion . The National Credit Study Group under the chairmanship of Prof. D.R. Gadgil , first conceived the "areas approach " for branch expansion . The committee of branches known as Narasimham Committee appointed by RBI's in 1969 , accepted the " area approach " and gave a practical shape to it under the title of Lead Bank Scheme .
An appraisal of Lead Bank Scheme -
1. Inproper start - The Lead Bank Scheme did not have a proper start . From the very beginning , there was inadequate understanding and even serious misunderstanding of the scope and objectives of Lead Bank Scheme .
2. Contiguity of Districts - Criterion of contiguity of districts could not always be followed in practice . Some regional banks were allotted districts and states where they had no foothold.
3. Ignorance of local problems- Many of the Lead Banks could not develop 'personal feel' for local problems and deposit potential .
4. Failure to conduct surveys - The Banking Commission found that Lead Banks were not properly equipped to conduct technology economic surveys of districts allotted to them .
5. Ignorance towards backward area - In the matter of branch expansion , underdeveloped and backward area still remained deprived of banking facilities .
13. What do you mean by Branch Banking System ?
Ans - Branch Banking is a system of banking through which banking activities are carried through a network of bank branches within a country .
14. What are the merits and demerits of branch banking system ?
Ans - Merits -
1. Large scale operations - A branch banking system enjoys certain advantages of large-scale operations due to following reasons -
(a) Highly trained and experienced staff is appointed which increases efficiency of management .
(b) Division of labour is introduced in banking operations which ensures greater economy in working of bank .
(c) Funds are made available liberally and at cheaper rates .
(d) Foreign exchange business is done economically .
2. Spreading of risks - Since there is diversification of risks, there is no danger of failure of the bank concerned . Moreover , if certain losses are incurred in depressed areas, they can be offset by earning profits in the prosperous areas .
3. Economy in cash reserve - Under this reserve , a particular branch can operate without keeping large amounts of idle reserves. In times of need, resources can be transferred from one branch to another.
4. Facilities regarding transfer of funds - It is easier and cheaper to transfer funds from one place to another under branch banking system .
5. Proper use of capital - There is proper use of capital under branch banking system . If a branch has excess reserves , but no opportunities for investment , it can transfer resources to other branches which can make most profitable use of resources .
Demerits -
1. Problem of management - Since there are hundreds of branches of a bank under this system , this leads to a number of difficulties in management , supervision and control of banking activities .
2. Lack of initiative - Branch managers, generally lack initiative on important matters. They cannot take independent decisions without consulting head office .
3. Possibilities of monopoly - A handful of high rank officials dominate entire working of bank . This creates a fertile ground for emergence of monopoly in banking .
4. Regional Imbalances - Under this system , financial resources are collected from smaller and backward areas and are mobilised to bigger industrial centres , which leads to regional imbalances in the country .
5. Adverse linkage effect - Under this system , losses and weakness of some branches have their adverse effect on other branches of bank .
15. What is Unit Banking system ? Discuss its advantages and disadvantages of unit banking system ?
Ans - Unit banking system is a system where operations of a bank are confined to a single office located in a particular area. It has virtually no branches .
Merits -
1. Convenience of management , supervision and control - Since size of bank under unit banking is small, its management , supervision and control are easier and more convenient for authorities .
2. Discontinuance of inefficient branches - Under unit banking system , a weak , inefficient and non-profitable branch will automatically cease to exist after some time .
3. Check on formation of monopolistic tendencies - Since unit banks are small in size, there is no possibility of growth of monopolistic banks .
4. No delay in banking business - There is no delay of any kind in taking decisions on important problems concerning unit bank .
5. Initiative in business - Unit banks have full knowledge of and greater involvement in local problems . So , they are in a position to take initiative to tackle these problems .
Demerits -
1. No distribution of risks- Under this system , there is little possibility of distribution and diversification of risks in various areas and industries .
2. Inability to face crisis - Unit banks are not in a position to face a sudden rush of withdrawals .
3. No banking development in backward areas - Because of limited resources , unit banks cannot afford to open uneconomic banking business in smaller towns and rural areas .
4. Lack of specialisation - Because of their small size, unit banks are not able to introduce and get advantages of division of labour and specialisation .
5. Costly remittance of funds - Since a unit bank has no branches at other places, it has to depend upon correspondent banks for transfer of funds which is very expensive .
16. Distinguish between branch banking and unit banking system ?
Ans - 1. Large scale economies - In branch banking there is huge financial resources and having a number of branches can enjoy certain advantages of large-scale economies of scale .
A unit bank with only one office or a few branches and having a limited financial resources cannot enjoy large scale economies of scale.
2. Risk - In Branch banking , since there is diversification of risks there is no danger of failure of bank concerned.
Under unit banking , danger of failure is ever present .
3. Transfer of funds - In branch banking system it is easier and cheaper to transfer funds from one branch to another branch .
Under unit banking , it is difficult to transfer funds .
4. Cash reserve ratio - In Branch banking system there is huge bank , with a number of branch in different places, can afford to manage with a lower cash reserve ratio in each of its branches .
In Unit bank , it has to maintain sufficient cash reserve to meet requirement of its depositors .
5. Rate of interest - There is an equality of interest rate under branch banking
There often arises inequality in rates of interest in different parts of the country .
17. Write a note on group banking ?
Ans - When two or more banks are directly owned , controlled and directed by a corporation , an association , etc. it is known as group banking . All policies of such banks are directed by holding company .
Merits - 1. Each member of the bank retains its separate entity and maintains its board of directors .
2. There is greater liquidity and mobility of resources .
3. Services of experts can be made available to member banks to manage their business efficiently .
4. Common standardised accounting system improves working of member banks.
5. There is economy of advertisement expenditure.
Demerits - 1. Control of member banks under group banking is less direct and more flexible than branch banking .
2. Efficiency of member banks is adversely affected because holding company uses banks as vehicles of manipulation and speculation .
3. The failure of one bank affects working of other banks.
4. The common purchasing agencies often indulge in corrupt practices .
18. What do you mean by Chain Banking ?
Ans - Chain banking is a system where an individual or group of individuals or members of a family control operations of two or more banks . The control is exercised either through holding majority of shares in each bank or interlocking directorship .
19. State the definition of a bank?
Ans - A bank is an institution which accepts deposits from people who have ability to save and provides financial assistance to people who need assistance by means of credit creation .Sir Horace White says, " Bank is a manufacture of credit and machine for facilitating exchanges ".
