BANK

A bank is a financial institution and a financial intermediary that accepts deposits and channels those
deposits into lending activities, either directly by loaning or indirectly through capital markets. A
bank is the connection between customers that have capital deficits and customers with capital
surpluses.

What are the functions of Commercial Banks?

In the modern world, banks perform such a variety of functions that it is not possible to make an all-
inclusive list of their functions and services. However, some basic functions performed by the banks
are discussed below.

1. Accepting Deposits
The first important function of a bank is to accept deposits from those who can save but cannot
profitably utilize this saving themselves. People consider it more rational to deposit their savings in a
bank because by doing so they, on the one hand, earn interest, and on the other, avoid the danger of
theft. To attract savings from all sorts of individuals, the banks maintain different types of accounts:
(i) Fixed Deposit Account:
Money in these accounts is deposited for fixed period of time (say one, two, or five years) and cannot
be withdrawn before the expiry of that period. The rate of interest on this account is higher than that
on other types of deposits. The longer the period, the higher will be the rate of interest. Fixed deposits
arc also called time deposits or time liabilities.
(ii) Current Deposit Account:
These accounts are generally maintained by the traders and businessmen who have to make a number
of payments every day. Money from these accounts can be withdrawn in as many times and in as
much amount as desired by the depositors. Normally, no interest is paid on these accounts; rather, the
depositors have to pay certain incidental charges to the bank for the services rendered by it. Current
deposits are also called demand deposits or demand liabilities.
(iii) Saving Deposit Account:
The aim of these accounts is to encourage and mobilise small savings of the public. Certain
restrictions are imposed on the depositors regarding the number of withdrawals and the amount to be
withdrawn in a given period. Cheque facility is provided to the depositors. Rate of interest paid on
these deposits is low as compared to that on fixed deposits.
(iv) Recurring Deposit Account:
The purpose of these accounts is to encourage regular savings by the public, particularly by the fixed
income group. Generally money in these accounts is deposited in monthly installments for a fixed
period and is repaid to the depositors along with interest on maturity. The rate of interest on these
deposits is nearly the same 3s on fixed deposits.

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(v) Home Safe Account:
Home safe account is another scheme aiming at promoting saving habits among the people. Under
this scheme, a safe is supplied to the depositor to keep it at home and to put his small savings in it.
Periodically, the safe is taken to the bank where the amount of safe is credited to his account.

2. Advancing of loans
The second important function of a bank is advancing of loans to the public. After keeping certain
cash reserves, the banks lend their deposits to the needy borrowers. Before advancing loans, the banks
satisfy themselves about the credits worthness of the borrowers. Various types of loans granted by the
banks are discussed below:
(i) Money at Call:
Such loans are very short period loans and can be called back by the bank at a very short notice of say
one day to fourteen days. These loans are generally made to other banks or financial institutions.
(ii) Cash Credit:
It is a type of loan, which is given to the borrower against his current assets, such as shares, stocks,
bonds, etc. Such loans are not based on personal security. The bank opens the account in the name of
the borrowers and allows him to withdraw borrowed money from time to time up to a certain limit as
determined by the value of his current assets. Interest is charged only on the amount actually
withdrawn from the account.
(iii) Overdraft:
Sometimes, the bank provides overdraft facilities to its customers though which they are allowed to
withdraw more than their deposits. Interest is charged from the customers on the overdrawn amount.
(iv) Discounting of Bills of Exchange:
This is another popular type of lending by the modern banks. Through this method, a holder of a bill
of exchange can get it discounted by the bank. In a bill of exchange, the debtor accepts the bill drawn
upon him by the creditor (i.e, holder of the bill) and agrees to pay the amount mentioned on maturity.
After making some marginal deductions (in the form of commission), the bank pays the value of the
bill to the holder. When the bill of exchange matures, the bank gets its payment from the party, which
had accepted the bill. Thus, such a loan is self-liquidating.
(v) Term Loans:
The banks have also started advancing medium-term and long-term loans. The maturity period for
such loans is more than one year. The amount sanctioned is either paid or credited to the account of
the borrower. The interest is charged on the entire amount of the loan and the loan is repaid either on
maturity or in installments.

3. Credit Creation
A unique function of the bank is to create credit. In fact, credit creation is the natural outcome of the
process of advancing loan as adopted by the banks. When a bank advances a loan to its customer, it
does not lend cash but opens an account in the borrower's name and credits the amount of loan to this
account. Thus, whenever a bank grants a loan, it creates an equal amount of bank deposit. Creation of
such deposits is called credit creation which results in a net increase in the money stock of the
economy. Banks have the ability to create credit many times more than their deposits and this ability
of multiple credit creation depends upon the cash-reserve ratio of the banks.

4. Promoting Cheque System:

Banks also render a very useful medium of exchange in the form of cheques. Through a cheque, the
depositor directs the bankers to make payment to the payee. Cheque is the most developed credit
instrument in the money market. In the modern business transactions, cheques have become much
more convenient method of settling debts than the use of cash.

5. Agency Functions:
Banks also perform certain agency functions for and on behalf of their customers:
(i) Remittance of Funds:
Banks help their customers in transferring funds from one place to another through cheques, drafts,
etc.

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(ii) Collection and Payment of Credit Instruments:
Banks collect and pay various credit instruments like cheques, bills of exchange, promissory notes,
(iii) Execution of Standing Orders:
Banks execute the standing instructions of their customers for making various periodic payments.
They pay subscriptions, rents, insurance premium, etc. on behalf of their customers.
(iv) Purchasing and Sale of Securities:
Banks undertake purchase and sale of various securities like shares, stocks, bonds, debentures etc. on
behalf of their customers. Banks neither give any advice to their customers regarding these
investments nor levy any charge on them for their service, but simply perform the function of a
broker.
(v) Collection of Dividends on Shares:
Banks collect dividends, interest on shares and debentures of their customers.
(vi) Income Tax Consultancy:
Banks may also employ income-tax experts lo prepare income-tax returns for their customers and to
help them to get refund of income-tax.
(vii) Acting as Trustee and Executor:
Banks preserve the wills of their customers and execute them after their death.
(viii) Acting as Representative and Correspondent:
Sometimes the banks act as representatives and correspondents of their customers. They get passports,
travelers tickets, book vehicles, plots for their customers and receive letters on their behalf.

6. General Utility Function:

In addition to agency services, the modern banks provide many general utility services as given
below:
(i) Locker Facility:
Banks provide locker facility to their customers. The customers can keep their valuables and
important documents in these lockers for safe custody.
(ii) Traveller's Cheques:
Banks issue traveller's cheques to help their customers lo travel without the fear of theft or loss of
money. With this facility, the customers need not take the risk of carrying cash with them during their
travels.
(iii) Letter of Credit:
Letters of credit are issued by the banks to their customers certifying their creditworthiness. Letters of
credit are very useful in foreign trade.
(iv) Collection of Statistics:
Banks collect statistics giving important information relating to industry, trade and commerce, money
and banking. They also publish journals and bulletins containing research articles on economic and
financial matters.
(v) Underwriting Securities:
Banks underwrite the securities issued by the government, public or private bodies. Because of its full
faith in banks, the public will not hesitate in buying securities carrying the signatures of a bank.
(vi) Gift Cheques:
Some banks issue cheques of various denominations (say of Rs. 11, 21, 31, 51.101, etc.) to be used on
auspicious occasions.
(vii) Acting as Referee:
Banks may be referred for seeking information regarding the financial position, business reputation
and respectability of their customers.
(viii) Foreign Exchange Business:
Banks also deal in the business of foreign currencies. Again, they may finance foreign trade by
discounting foreign bills of exchange.

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CASH RESERVE RATIO (CRR)
Cash Reserve Ratio (CRR) Cash Reserve Ratio (CRR) is the amount of funds that all Scheduled
Commercial Banks (SCB) excluding Regional Rural Banks (RRB) are required to maintain without
any floor or ceiling rate with RBI with reference to their total net Demand and Time Liabilities (DTL)
to ensure the liquidity and solvency of Banks (Section 42 (1) of RBI Act 1934). The current CRR is
4.00%
Demand and Time Liabilities
Liabilities of a bank may be in the form of demand or time deposits or borrowings or other
miscellaneous items of liabilities. Liabilities of the banks may be towards banking system (as defined
under Section 42 of RBI Act, 1934) or towards others in the form of Demand and Time deposits or
borrowings or other miscellaneous items of liabilities.
Demand Liabilities : Demand Liabilities include all liabilities which are payable on demand and
they include current deposits, demand liabilities portion of savings bank deposits, margins held
against letters of credit/ guarantees, balances in overdue fixed deposits, cash certificates and
cumulative/ recurring deposits, outstanding Telegraphic Transfers (TTs), Mail Transfer (MTs),
Demand Drafts (DDs), unclaimed deposits, credit balances in the Cash Credit account and deposits
held as security for advances which are payable on demand.
Time Liabilities: Time Liabilities are those which are payable otherwise than on demand and they
include fixed deposits, cash certificates, cumulative and recurring deposits, time liabilities portion of
savings bank deposits, staff security deposits, margin held against letters of credit if not payable on
demand, deposits held as securities for advances which are not payable on demand, India Millennium
Deposits and Gold Deposits.
Effects on money supply
The reserve requirement can be used as an instrument of monetary policy, because the higher the
reserve requirement is set, the less funds banks will have to loan out, leading to lower money creation
and perhaps ultimately to higher purchasing power of the money previously in use.

Basel Accords
The Basel Accords (see alternative spellings below) refer to the banking supervision Accords
(recommendations on banking regulations)Basel I, Basel II and Basel IIIissued by the Basel
Committee on Banking Supervision (BCBS). They are called the Basel Accords as the BCBS
maintains its secretariat at the Bank for International Settlements in Basel, Switzerland and the
committee normally meets there
Objective of Basel Accords
The final version aims at:
1. Ensuring that capital allocation is more risk sensitive;
2. Enhance disclosure requirements which will allow market participants to assess the capital
adequacy of an institution;
3. Ensuring that credit risk, operational risk and market risk are quantified based on data and
formal techniques;
Basel III (or the Third Basel Accord) is a global, voluntary regulatory standard on bank capital
adequacy, stress testing and market liquidity risk. It was agreed upon by the members of the Basel
Committee on Banking Supervision in 201011, and was scheduled to be introduced from 2013 until
2015; changes from April1,, 2013 extended implementation until March 31,2018 however.

Key principles
Capital requirements
Leverage ratio
Liquidity requirements

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 Statutory liquidity ratio (SLR) refers to the amount that the commercial banks require to
maintain in the form of gold or govt. approved securities before providing credit to the customers.
Here by approved securities we mean, bond and shares of different companies. Statutory
Liquidity Ratio is determined and maintained by the Reserve Bank of India in order to control the
expansion of bank credit. It is determined as percentage of total demand and time liabilities. At
present, the minimum limit of SLR that can be set by the Reserve Bank is 23% AS ON AUGUST
2012

Objectives of SLR:
1. To control the expansion of bank credit. By changing the level of SLR, the Reserve Bank of
India can increase or decrease bank credit expansion.
2. To ensure the solvency of commercial banks.
3. To compel the commercial banks to invest in government securities like government bonds.

Priority Sector Lending is an important role given by the Reserve Bank of India (RBI) to the banks
for providing a specified portion of the bank lending to few specific sectors like agriculture or small
scale industries. This is essentially meant for an all round development of the economy.

1. What is meant by Priority Sector?

Priority sector refers to those sectors of the economy which may not get timely and adequate credit in
the absence of this special dispensation. Typically, these are small value loans to farmers for
agriculture and allied activities, micro and small enterprises, poor people for housing, students for
education and other low income groups and weaker sections.

2. What are the different categories under priority sector?

Priority Sector includes the following categories:
(i) Agriculture
(ii) Micro and Small Enterprises
(iii) Education
(iv) Housing
(v) Export Credit
(vi) Others

3. What are the Targets and Sub-targets for banks under priority sector?
Categories Domestic commercial banks / Foreign Foreign banks with less than 20
banks with 20 and above branches branches

Total Priority Sector 40% Of loan able fund 32% Of loan able fund
Total agriculture 18% Of loan able fund No specific target.
Advances to Weaker Sections 10% Of loan able fund No specific target.

4. What constitutes 'Direct Finance' for Agricultural Purposes?

(i) Loans to individual farmers [including Self Help Groups (SHGs) or Joint Liability Groups (JLGs),
i.e. groups of individual farmers] engaged in Agriculture and Allied Activities, viz., dairy, fishery,
animal husbandry, poultry, bee-keeping and sericulture.
(ii) Loans to small and marginal farmers for purchase of land for agricultural purposes.
(iii) Loans to distressed farmers indebted to non-institutional lenders.
(iv) Bank loans to Primary Agricultural Credit Societies (PACS), Farmers Service Societies (FSS)
and Large-sized Adivasi Multi Purpose Societies (LAMPS) ceded to or managed/ controlled by such
banks for on lending to farmers for agricultural and allied activities.

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5. What constitutes 'Indirect Finance' to Agriculture?
(i) Loans to corporates, partnership firms and institutions engaged in Agriculture and Allied Activities
(dairy, fishery, animal husbandry, poultry, bee-keeping and sericulture).

6. What is included under Weaker Sections under priority sector?

Priority sector loans to the following borrowers are considered under Weaker Sections category:-
1. Small and marginal farmers;
2. Beneficiaries of Swarnjayanti Gram Swarozgar Yojana (SGSY), now National Rural
Livelihood Mission (NRLM);
3. Scheduled Castes and Scheduled Tribes;
4. Beneficiaries of Differential Rate of Interest (DRI) scheme;
5. Beneficiaries under Swarna Jayanti Shahari Rozgar Yojana (SJSRY);
6. Beneficiaries under the Scheme for Rehabilitation of Manual Scavengers (SRMS);
7. Loans to Self Help Groups;

RBI
The Reserve Bank of India (RBI) is India's central banking institution, which formulates the
monetary policy with regard to the Indian rupee. It was established on 1 April 1935 during the British
Raj in accordance with the provisions of the Reserve Bank of India Act, 1934. Following India's
independence in 1947, the RBI was nationalised in the year 1949.

Main functions Of RBI

A. Traditional Functions
1. Monopoly of Note Issue.
2. Banker to the Government Agent and adviser to the Government
3. Banker to the Banks. Acts as the clearing
4. House of the country Lender of last resort Controller of credit and fore Custodian of
foreign
5. Exchange reserves maintaining the external value of domestic currency.
6. Ensures the internal value of currency.
7. Publishers the Economics Statistics and other.
8. The following are the important functions of RBI. They can be explained with the help of
the following chart:
B. Supervisory Functions
1. Granting license to banks.
2. Inspect and make enquiry or determine position in respect of matters under various
sections of RBI and Banking Regulation Act.
3. Implementation of Deposit Insurance Scheme.
4. Periodical review of review of the work of commercial banks.
5. Giving directives to commercial banks.
6. Control the non- banking finance corporations.
7. Ensuring the health of financial system through on-site and off-site verifications.

2. Banker to the Government

It also acts as adviser to Government on economic and financial matters. In brief, as a banker to the
Government the RBI renders the following functions:
(a) Collects taxes and makes payments on behalf of the Government
(b) Accepts deposits from the Government
(c) Collects cheques and drafts deposited in the Government accounts.
(d) Provides short-term loans to the Government
(e) Provides foreign exchange resources to the Government.

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(f) Keep the accounts of various Government Department.
(g) Maintains currency chests in treasuries at some importance places for the convenience of the
government.
(h) Advises governments on their borrowing programmes.
(i) Maintains and operates Central Government's IMF accounts.

3. Agent and Adviser of the Government

The RBI acts, as the financial agent and adviser to the Government. It renders the following functions:
(a) As an agent to the Government, it accepts loans and manages public debts on behalf of the
Government.
(b) It issues Government bonds, treasury bills, etc.
(c) Acts as the financial adviser to the Government in all important economic and financial matters.

4. Banker to the Banks

All banks in India, should keep certain percentage of their demand and time liabilities as reserves with
the RBI. This is known as Cash Reserve Ratio or CRR. They also maintain Current Account with RBI
for various banking transactions. This centralization of reserves and accounts enables the RBI to
achieve the following:
(a) Regulation of money supply credit.
(b) Acts as custodian of cash reserves of commercial banks.
(c) Strengthen the banking system of the country
(d) Exercises effective control over banks in Liquidity Management.
(e) Ensures timely financial assistance to the Banks in difficulties.
(f) Gives directions to the Banks in their lending policies in the public interest.
(g) Ensures elasticity in the credit structure of the country.
(h) Quick transfer of funds between member banks.

5. Acts as the Controller of Credit

The RBI controls the credit creation by commercial banks. For this, the RBI uses both quantitative
and qualitative methods. The important methods used by RBI are,
(i) Bank Rate Policy
(ii) Open Market Operation selling securities to public
(iii) Variation of Cash Reserve Ratio
(iv) Fixing Margin Requirements
(v) Moral Suasion
(vi) Repo Rate and Reverse Repo Rate selling securities to banks.

By controlling credit, the RBI achieves the following:

(a) Maintains the desired level of circulation of money in the economy.
(b) Maintains the stability in the price level prevailing in the economy.
(c) Controls the effects of trade cycles
(d) Controls the fluctuations in the foreign exchange rate
(e) Channelize credit to the productive sectors of the economy

6. Custodian of Foreign Exchange Reserves

The RBI acts as the custodian of foreign exchange reserves. Adequate reserves may help maintain
foreign exchange rates. In order to minimize the undue fluctuations in the rates it may buy and sell
foreign currencies depending upon the situations.

7. Exchange Control
When a country faces Balance of Payment of problems usually when its foreign exchange payments
exceed foreign exchange receipts it controls the whole gamut of fore (foreign exchange) transactions
and regulates payment system for its advantage. The RBI by its operation of credit control and price
stability maintains the internal value of domestic currency and ensures its stability.

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RE-PO agreement
A repurchase agreement, also known as a repo, RP, or sale and repurchase agreement, is the sale
of securities together with an agreement for the seller to buy back the securities at a later date. The
repurchase price should be greater than the original sale price, the difference effectively representing
interest, sometimes called the repo rate. The party that originally buys the securities effectively acts
as a lender. The original seller is effectively acting as a borrower, using their security as collateral for
a secured cash loan at a fixed rate of interest.
As of now REPO rate is 7.25%

A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate
increases borrowing from the central bank becomes more expensive. It is more applicable when there
is a liquidity crunch in the market.

Reverse repo is reverse of REPO.

TRY TO EXPLAIN LINK BETWEEN INFLATION AND REPO & Reverse REPO.

As of 3 May 2013, the key indicators are

Indicator Current rate
Inflation 5.96%
Bank rate 10.25%
CRR 4.00%
SLR 23%
Repo rate 7.25%
Reverse repo rate 6.25%

Monetary policy is the process by which monetary authority of a country, generally a central bank
controls the supply of money in the economy by exercising its control over interest rates in order to
maintain price stability and achieve high economic growth.[1] In India, the central monetary authority
is the Reserve Bank of India (RBI). is so designed as to maintain the price stability in the economy.

Monetary tools
1. Quantitative
a. CRR
b. SLR
c. Repo and Reverse Repo
d. Bank rate
e. OMOs

2. Qualitative
a. Collateral requirement
b. Priority sector lending
c. Differential rate of interest
d. SHG-Bank linkage
e. Moral suasion

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