Banking Business

Introduction to Banking Business

The word “bank” is derived from the Italian word “banca” for bench or counter. With the expansion of trade across the world, banking started flourishing with more exchange of currencies and deposits. But was soon practically destroyed after the fall of Roman Expire due to decline n trade which led to decrease in need for transferring money for financing trade.

Later we have had the Bank of Bengal, Bank of Madras and Bank of Bombay which later were merged and became Imperial Bank of India.  This was again nationalized to become State Bank of India.  Reserve Bank of India came in to existence in 1935, which controls the entire Banking activity in India.  The structure of Banking industry in India can be described as under.

Today, several forms of banking exist, giving consumers a choice in the way they manage their money. Most people do a combination of at least two banking types. However, the type of banking a consumer uses normally is based on convenience.

(A) Walk-in-Banking

The advantage of walk in Banking is the face to face connection established between the banker and a customer. Also unlike a Drive Thru and ATM banking, a person can apply for a loan and invest money during a walk in thus developing a rapport.

(B) Drive thru Banking

It is probably the least popular form of banking today, but is still used enough by consumers to create a need for it. It allows consumers to stay in their while and drive up to a machine equipped with container, chute and intercom. This machine is connected to a bank and is run by one or two bank letters. A person can withdraw or deposit money at a drive thru and the bank teller and banker use it to communicate and discuss the specific banking request. 

(C) ATM Banking

It is very popular because it gives a person 24 hour access to his bank account. Walk in and drive thru banking do not offer this perk. In order to use an ATM, a person must have an ATM card with personal identification number (PIN) and access to an ATM machine.  Any ATM machine can be used, but charges apply for not complying with certain conditions stipulated.

(D) Online Banking

It allows a person to get on to the internet and sign into their bank. This process is achieved with the use of a PIN, different from the one used for the ATM card. By going to the website of a bank, a consumer gets into his account, withdraws money, deposits money, pays bills, requests for loans and invests money.  Online banking is growing in popularity because of its convenience.

These different types of banking give a consumer the power and convenience of choice.  Thus, a bank can play an useful role in promoting the economic development of any country. Banks’ lending and investment activities lead to changes in the quantity of money in circulation which in turn influence the nature and quality of production.

Therefore, banks have been rightly crowned as ‘the nerve’ centre of all economic activity. Also Banks play an important role in the day to day life of every consumer Now let us understand more about the common banking business transacted in our country

1. Accepting Deposits

Accepting deposits is considered to be one of the major functions of commercial banks.  Banks accept deposits  and lend it to others and earn interest. Basically, the money is accepted as deposit for safe keeping. Banks also pay interest on these deposits. To attract depositors banks maintain different types of accounts.  Some of them can be more explained as under:

Fixed Deposit Accounts: The account which is opened for a fixed period by depositing a particular sum is known as a fixed deposit account. The money deposited in this account cannot be withdrawn before expiry of period, however attracts a penalty (which is not applicable on Retail Deposits these days), if withdrawn prematurely.  A high rate of interest than that of a Savings Account is paid on these deposits.

Current Deposit Account: Current deposit accounts are mostly opened by businessmen and traders/corporates, who deposit and withdraw money number of times in a day. Banks do not pay interest on these deposit accounts. The bank collects certain charges from depositors for services rendered therein.

Saving Account: Saving account as the name suggests is to encourage the Savings habit of individuals. They are opened with a minimum initial deposit. A minimum balance has to be maintained in account as prescribed by every bank. Some restrictions are imposed on depositors regarding number of deposits/withdrawals and amount to be withdrawn during a particular period (a month or a quarter).

Recurring Deposit Account: The purpose of these accounts is to encourage Savings in the minds of public, particularly those belonging to fixed income group. A Fixed amount is deposited at regular intervals for a fixed term and repaid on maturity.

2. Granting of Loans and Advances

Besides accepting deposits, the other important function of commercial banks is granting loans to the public. After keeping a portion of deposits received as reserve the rest is extended as loan. Different types of loans and advances are:

1. Call Money: These are generally short term credits ranging from one day to fort night. Call money is extended even overnight through the Call money  The rate of interest depends upon the conditions prevailing in money market.
2. Overdraft: Here, a customer has the leverage to withdraw money from his current account when the available balance is zero. For the amount overdrawn, interest is charged at an agreed rate. Overdraft is allowed normally against the security of negotiable Instruments only to the credit worthy customers which can be extended either with or without any security.
3. Cash Credit: In a cash credit, Banks advance loans against the customers’ current assets/personal The borrower has an option to withdraw the funds as and when required with in a limit stipulated. The cash credit limit depends on the debtor’s needs and his capacity to repay. The bank charges interest only on the debit balance in the account.
4. Discounting of Bills: Under this type of lending, Banks discount the customers’ collection bills. A commission or discount charges are levied on the amount availed. The holder of a bill gets money immediately without waiting for its realization. If the bill of exchange is dishonored on due date the bank can recover the amount from the customer and banks also have the legal recourse to recover the dues if any.
5. Direct Loan: Direct Loans are usually secured against some collateral security. Payments are either made to the borrower directly or through Payment order or Demand Draft. Interest is charged on the entire loan amount. Repayment of loan is made either in installments or in lump sum.

3. Secondary Functions

The important Secondary Services rendered by banks are:

• Sale and Purchase of Securities: On behalf of a customer, commercial banks sell and purchase securities of private companies as well as government securities and bonds.
• Transfer of Funds: Commercial Banks also provide facilities to transfer funds from one place to another place through various remittance processes viz Bank draft, Cheques,  Mail transfers etc.
• Collection and Payment of Credit Instrument: Commercial Banks collect and make payment on behalf of their customers negotiable instruments and also do the services of remitting rent, income tax fees, insurance premium etc.
• Locker Facility: Commercial Banks provide locker facilities to their customers, wherein customers can keep gold, silver and important documents.
• Letter of Credit: Letter of credit is one which certifies the credit worthiness of the customers and are issued by commercial banks. There are various types of Letters of Credit issued.
• Collection of Information: Commercial Banks also collect the information relating to Industry, trade, commerce and are made available to their customers.
• Facilities to NRI: Various facilities are extended to Non Residents.  To name a few – Opening of NRE/NRO accounts, FCNR and RFC accounts, Providing remittance facilities, Extending Import And Export Credits, Opening of Foreign LCs and Bank Guarantees, Entering to various Treasury transactions, Booking of various forward contracts, Hedging business, and providing Foreign Exchange advices.
• Issue of Traveller’s Cheque and Credit Card: Commercial Banks issue travelers cheques and credit cards to their customers. They can travel without the fear of theft and loss of money. Credit cards are also used to make payment for purchases so that individuals need not carry cash.
• Foreign Exchange: Commercial banks provide various Foreign Exchange solutions to their customers and provide guidelines on FEMA regulations.
• Issuing of Gift Cheques: Commercial Banks issue gift cheques in various denominations of INR 11, INR 51, INR 101,INR 501 etc.
• Educational Loans: Commercial Banks also provide educational loan to students for higher studies at simple rate of interest.
• Consumer Finance: Commercial Banks provide consumer finance for purchase of consumer durables like televisions, refrigerators etc.
• Automated Teller Machine/KIOSKS: Now a days with the help of an ATM, we can deposit or withdraw money from our account any time. Further, recently HDFC has come out with the proposal of sanctioning and approving Loans through ATMs.
• Investment Banking: Banks also provide investment banking services, which include, Securitization (Take over of loans), Mergers and Acquisitions, maintenance of customers’ Investment portfolios related to their Wealth management, Providing guidelines on managing a company etc.,

OTHER IMPORTANT SERVICES

REMITTANCE SERVICES:

Remittance can be made by a customer to different places through various means like:

1. Remittance through Payorder or a Demand Draft.
2. Remittance through NEFT or RTGS.
3. In a Core Banking Solution environment, it is convenient for transfer through the customers’ account, PAN India, if both the parties maintain the account with the same bank.
4. Different ways of remitting money through a Mobile is the order of the day.  The Technology has been exploited to its maximum to provide the best customer service.  Inter Bank Mobile Payment system has made revolution in this direction.
5. SWIFT is another way of remittances that could be effected for any Foreign exchange remittance or transactions.
6. A cheque sent through the normal clearing is another way of remitting money from one end to another.
7. Electronic Clearing System has come handy in remittances through ECS Debit or ECS Credit.

There are different services, rendered by banks, which are numerous in number. Banking has become a part of our today’s life, and our dependency on banking industry is increasing day by day.

Of course, Bankers face a great challenge in the days to come.