Finance is the life blood of business. It is needed for uninterrupted supply of goods and services from the producers to the ultimate consumers through various intermediaries. Banks play a vital role in meeting the financial requirement of various business activities.
Banks occupy an important position in the modern business world. No country can make commercial and industrial progress without a well organised banking system. Banks encourage the habit of saving among the public. They mobilize small savings and chennelise them into productive uses.
According to the Banking Regulations Act 1949, banking means “accepting for the purpose of
lending or investment of deposits of money from the public, repayable on demand or
otherwise and may be withdrawn by cheque, draft or otherwise”.
In modern times bank is an institution which accept deposit for the purpose of lending money to needy people. They earn margin which is their profit.
Types of Banks:-
On the basis of focus of banking, we have following different type of banks:-
- Commercial Bank:-
Commercial banks are institution dealing in money and credit. Banking is a business of receiving deposit, lending them to the people needs finance and rendering other useful services. Interest on deposit is always less than interest on loan. The difference is called as margin and it is the profit of the bank. Commercial banks are governed by Indian Banking Regulation Act 1949. There are two types of commercial banks- Public sector banks and private Sector banks.
Public Sector Banks: – Public sector banks are those banks in which the government has major share. Public sector banks are dominating the banking scene in India since three decades. This was possible with the setting up State Bank of India and nationalizing 20 major commercial banks (14 banks 1969 and 6 in 1980). SBI and its associate banks such as SBT, Canara Bank, Punjab National Bank, Syndicate Bank etc… are some examples.
Private Sector Banks: – These are the banks which are owned, managed and controlled by privet parties. But they are subject to regulations of Reserve Bank of India. In India private banks are categorized into three:-
Old Generation Banks- include Federal Bank, South Indian Bank etc……, New Generation Banks- includes ICICI Bank, HDFC bank. Etc.., and foreign banks- includes Citibank, American Express etc…
- Co-operative Banks: – Co-operative banks are organised on co-operative lines. These banks are governed by the provision of State Co-operative Societies Act. They are meant essentially for providing cheap credit facilities to their members. It is an important source of rural credit and agricultural credit.
- Specialised Banks: – Specialised banks are those banks which render specific services to the public. These include foreign exchange banks, industrial banks, development bank, export- import bank etc….
- Central Banks: – A central bank is the principal banking institution of a country. It is owned and managed by government. It supervises, guides, controls and regulates the activities of all banks in the country. It acts as banker to the government, as bankers’ bank, as lender of last resort, as custodian of foreign exchange reserve and as controller of credit and money of any country. The Reserve Bank of India is the central bank of our country which was established in 1935.
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Functions of Commercial banks:-
Banks perform a variety of functions. Some of them are the basic or primary functions of a bank while others are secondary functions. The impotent functions are discussed below;-
1. Accepting Deposits: – Accepting deposits is the main function of commercial banks. Banks offer different types of Bank accounts to suit the requirements and needs of different customers. Different types of Bank accounts are as follows:
- Fixed Deposit Account:- Money is deposited in the account for a fixed period. After expiry of specified period person can claim his money from the bank. Usually the rate of interest is at maximum in this account. The longer the period of deposit, the higher will be the rate of interest on deposit.
- Current Deposit Account:- Current deposit Accounts are opened by businessman. The account holder can deposit and withdraw money whenever desired. As the deposit is repayable on demand, it is also known as demand deposit .Withdrawals are always made by cheque. No interest is paid on current accounts. Rather charges are taken by bank for services rendered by it.
- Saving Deposit Account:-The aim of a saving account is to mobilise savings of the public. A person can open this a/c by depositing a small sum of money. He can withdraw money from his account and make additional deposits at will. Account holder also gets interest on his deposit in this account, though the rate of interest is lower than the rate of interest on fixed deposit account.
- Recurring Deposit Account:-The aim of recurring deposit is to encourage regular savings by the people. A depositor can deposit a fixed amount, say Rs. 100 every month for a fixed period. The amount together with interest is repaid on maturity. The interest rate on this account is higher than that on saving deposits.
- Multiple Option Deposit Accounts:-It is a type of saving Bank A/c in which deposit in excess of a particular limit gets automatically transferred into Fixed Deposit. On the other hand, in case adequate fund is not available in our saving Bank Account so as to honour a cheque that we have issued the required amount gets automatically transferred from fixed deposit to the saving bank account. Therefore, the account holder has twin benefits from this account (i) he can earn more interest and (ii) It lowers the risk of dishonouring a cheque.
2. Lending Money: – With the help of money collected through various types of deposits, commercial banks lend finance to businessman, farmers, and others. The main ways of lending money are as follows:
- Term Loans:-These loans are provided by the banks to their customers for a fixed period to purchases Machinery, Truck, Scooter, House etc. The borrowers repay these loans in Monthly/Quarterly/Half Yearly/ Annually installments.
- Bank Overdraft:-The customer, who maintains a current account with the bank, takes permission from the bank to withdraw more money than deposited in his account. The extra amount withdrawn is called overdraft.
This facility is available to trustworthy customers for a small period. This facility is usually given against the security of some assets or on the personal security of the customer. Interest is charged on the actual amount overdrawn by the customer.
- Cash Credit:- Under this arrangement, the bank advances cash loan up to a specified limit against current assets and other securities. The bank opens an account in the name of the borrower and allows him to withdraw the money from time to time subject to the sanctioned limit. Interest is charged on the amount actually withdraw.
- Discounting of Bill of Exchange :-Under this, a bank gives money to its customers on the security of a bill of exchange before the expiry of the bill in case a customer is needs it. For this service bank charges discount for the remaining period of the bill.
The secondary functions of commercial banks are as under:
1. Agency Functions:- As an agent of its customers, a commercial bank provides the following services:
- Collecting bills of exchanges, promissory notes and cheques.
- Collecting dividends, interest, rent etc.
- Buying and selling shares, debentures and other securities
- Payment of interest, insurance premium, etc
- Transferring funds from one branch to another and from one place to another
- Acting as an agent or representative while dealing with other banks and financial institutions.
A commercial bank performs the above functions on behalf of and as per the instructions of its customers.
2. General Utility Functions: – Commercial banks also perform the following miscellaneous functions.
- Providing lockers for safe custody of jewellery and others valuables of customers.
- Giving references about the financial position of customers.
- Providing information to a customer about the credit worthiness of other customers.
- Supplying various types of trade information useful to customers
- Issuing letter of credit, pay orders, bank draft, credit cards, and traveler’s cheques to customers.
- Underwriting issues of shares and debentures.
- Providing foreign exchange to importers and travelers going abroad.
Bank Draft: – It is a financial instrument with the help of which money can be remitted from one place to another. Anyone can obtain a bank draft after depositing the amount in the bank. The bank issues a draft for the amount in its own branch at other places or other banks (only in case of tie up with those banks) on those places. The payee can present the draft on the drawee bank at his place and collect the money. Bank charges some commission for issuing a bank draft.
Using computers and internet in the functioning of the banks is called e-banking or electronic banking. Because of these services the customers do not need to go to the bank every time he has to transact with bank. He can make transactions with the bank at any time and from any place. The chief electronic services are the following.
- Electronic Fund Transfer:-Under it, a bank transfers wages and salaries directly from the company s account to the accounts of employees of the company. The other examples of EFTs are on line payment of electricity bill, water bill, insurance premium, house tax etc.
- Automatic Teller Machines (ATMs):- ATM is an automatic machine with the help of which money can be withdrawn or deposited by inserting the card and typing your personal Identity Number (PIN). This machine operates for all the 24 hours.
- Debit Card: – A Debit Card is issued to customers in lieu of his money deposited in the bank. The customers can make immediate payment of goods purchased or services obtained if sufficient balance in his account on the terminal facility is available with the seller.
- Credit Card:-A bank issues a credit card to those of its customers who enjoy good reputation. This is a sort of overdraft facility. With the help of this card the holder can buy goods or obtain services up to a certain amount even without having sufficient deposit in their bank accounts.
- Tele Banking: – Under this facility, a customer can get information about the balance in his account or information about the latest transactions on the telephone.
- Core Banking Solution/Centralised Banking Solution:- In this system a customer by opening a bank account in one branch (which has CBS facility) can operate the same account in all CBS branches of the same bank anywhere across the country. It is immaterial with which branch of the bank the customer deals with when he/she is a CBS branch customer.
- Mobile banking: – It is a system that allows customers of a bank to conduct a number of financial transactions through a mobile device such as mobile phone or tablet. By this a customer can access to his account through applications in the device. He can transfer fund, get mini statement of transaction, get alert on account activity etc… through this system
Benefits of e-Banking:-
- E-banking provides round the clock, 365 days a year services to the customers
- Customers can enter into bank transaction from office or house or when travelling via mobile phone
- It create a sense of financial discipline
- Greater customer satisfaction by offering unlimited access to the bank
- Load on branches is considerably reduced
Life is full of uncertainties. The chances of occurrence of an event may cause losses to the life and properties of individuals. The individuals or organisation may suffer a great loss, sometimes beyond their capacities to bear same. So there arises the need for a system which protects property and human beings from various risks. Insurance has been originated for fulfillment of this need.
Insurance is a contract between two parties viz. the insurer and the insured. The insurer is the person who compensates other person against possible losses. The insured is the person who gets his life or properties insured against risk. For this service the insured need to pay a price or consideration called premium to the insurer. The document containing the terms and conditions of insurance is called the policy.
Thus Insurance is a form of contract under which one party (Insurer or Insurance Company) agrees in return of a consideration (Insurance premium) to pay an agreed sum of money to another party (Insured) to make good for a loss, damage or injury to something of value in which the insured has financial interest as a result of some uncertain event.
Functions of Insurance:-
- Insurance shares risk and not eliminate the risk
- Insurance affords protection from probable chance of loss
- Insurance (especially life insurance) encourage savings
- Insurance crates funds for investments- capital formation
- Insurance provides fund for developmental programs
Principles of Insurance:-
Insurance is a contract and it is based on certain fundamental principles. The following are them:-
- Utmost Good Faith (uberrimae fidei):-Insurance contracts are based upon mutual trust and confidence between the insurer and the insured. It is a condition of every insurance contract that the parties, insurer and the insured must disclose each fact and information related to insurance contract to each other.
- Insurable Interest: It means some pecuniary interest in the subject matter of insurance contract. The insured must have insurable interest in the subject matter of insurance i.e., life or property insured, the insured will have to incur loss due to this damage and insured will be benefitted if full security is being provided. A businessman has insurable interest in his house, stock, his own life and that of his wife, children etc.
In life insurance , the insurable interest must exist at the time of policy is taken. It need not be in existence at the time of death. In marine insurance, the insurable interest must be present at the time loss of the subject matter. In fire and other insurance, the insurable interest must be present not only at the time of taking the policy but also at the time o loss.
- Indemnity: Principle of indemnity applies to all contracts except the contract of life insurance because estimation regarding loss of life cannot be made. The objective of contract of insurance is to compensate to the insured for the actual loss he has incurred. These contracts provide security from loss and no profit can be made out of these contracts. For e.g. a property is insured against fire for Rs.100000. fire occur and loss incurred for Rs. 75000. The insurance Co. shall allow claim only for Rs.75000 and not for Rs.100000
- Proximate Cause or Cousa Proxima: The insurance company will compensate for the loss incurred by the insured due to reasons mentioned in insurance policy. But if losses are incurred due to reasons not mentioned in insurance policy then principle of proximate cause or the nearest cause is followed.
- Subrogation: This principle applies to all insurance contracts which are contracts of indemnity. As per this principle, when any insurance company compensates the insured for loss of any of his property, then all rights related to that property automatically get transferred to insurance company.
- Contribution: According to this principle if a person has taken more than one insurance policy from different insurance Co. for the same risk (Double Insurance) then all the insurance Co. will contribute the amount of loss in proportion to the amount assured by each of them and compensate him for the actual amount of loss because he has no right to recover more than the full amount of his actual loss.
- Mitigation of Loss: According to this principle the insured must take reasonable steps to minimise the loss or damage to the insured property otherwise the claim from the insurance company may be lost. He must act like any uninsured man.