AHSEC| CLASS 12| FINANCE| CHAPTER - 1| COMMERCIAL BANKING IN INDIA| SOLVED QUESTIONS FOR 6/8 MARK EACH| H.S. 2ND YEAR
commercial banking in india
1. Discuss
the functions of Public Sector Bank in India.
Ans: Some of
the major functions of SBI are discussed below –
(i) Agent of
the Reserve Bank: The State Bank of India acts as an agent of the Reserve
Bank of India at all places in the country where the Banking Department of the
Reserve Bank does not have a branch.
At such places,
on behalf of the Reserve Bank, it receives, collects, and remits money,
securities and transacts other business entrusted to it by the Reserve Bank.
(ii)
Acceptance of Deposits: SBI like any other commercial bank accepts deposits
from the public in various accounts.
(iii) Loan
Advances: SBI advances loans against eligible securities to its customers, traders,
and industrialists etc. These advances may be in the form of overdrafts, cash
loans, loans and advances, discounting of bills, call money etc.
(iv)
Investment and Borrowing: SBI invests in government securities and borrows
from the Reserve Bank.
(v) Deals in
Bills of Exchange: SBI draws, accepts, discounts, buys, and sells Bills of
Exchange.
(vi) Buying
and selling of gold and silver: SBI buys and sells gold and silver. To
invest its capital this bank can buy gold and silver and it can sell gold and
silver if the prices of these precious metals are increased in the market to
make profit.
(vii) Dealings
in Foreign Currency: SBI is an authorized agent for dealing in Indian
Rupees in foreign currencies and Rupees in foreign currencies.
(viii)
Transfer of Money: SBI undertakes to transfer money deposited by customers
from one place to another through cheques, drafts etc. easily from one state to
another
(ix)
Safeguarding of Precious Metals: SBI provides locker facility to the
customer for safekeeping of gold, silver, and valuable documents. For providing
this facility the bank charges locker rent from the customers who opt out of
this facility.
2. Write a
brief note on the State Bank of India.
Exam paper: 2016
Ans: The
State Bank of India was organized by the nationalization of the Imperial Bank
of India. The Imperial Bank lost its power just after the establishment of the
Reserve Bank of India. State Bank of India was established on 1 July 1955 with
the objective of expanding banking facilities in rural areas by changing the
name of Imperial Bank of India. Although the Imperial Bank was an important
banking institution on 16 April 1955. The State Bank of India Bill was passed
by the Government of India on 8 May 1955. The State Bank of India was organized
based on the recommendation of the All-India Rural Credit Survey Committee
(AIRCSC), which was appointed by the Reserve Bank of India in 1951.
State Bank of
India is managed by the Central Board of Directors. The board consists of a
chairman, a vice-chairman, two managing directors and sixteen directors. The
State Bank of India performed all the functions performed by a commercial bank.
In addition, the State Bank of India performed as an agent of the Reserve Bank
of India where Reserve Hull-Bay has no branch. Bank of India.
3. Explain
briefly about the growth of commercial banks in India during the
post-Independence period. Exam paper:
2012
Ans: The
growth of commercial banks in India in the post-independence period is as
follows:
(i) In order to
prevent the dissolution of commercial banks and to organize and manage them on
a sound basis, the Banking Regulation Act was enacted in the year 1949.
(ii) In 1954 the All-India
Rural Credit Inquiry Committee was formed.
(iii) SBI and its
Associate Banks Act was established in 1957.
(iv)
Establishment of Saraiya Commission of Banking Commission in 1967.
(v) Social
control over commercial banks in 1968.
(vi) Fourteen
major commercial banks were nationalized in July 1969.
(vii)
Establishment of Regional Rural Bank on 2 October 1975.
(viii) Six more
commercial banks were nationalized in the year 1980.
(ix) New
generation private sector banks after 1994.
4. Explain
the advantages and disadvantages of Group Banking System.
Ans: The
group banking system has the following advantages:
(i) Economics
of large-scale operations: Participating banks can take advantage of large-scale
operations, for example, economy in advertising, purchasing stationery, etc.
(ii) Wide
Market: It provides a wide market to the member banks. This helps the
member banks to improve their earning potential. and network.
(iii)
Diversification of Risks: Under this system there is a possibility of
diversification and distribution of risks of the business.
(iv) Low Cash
Reserves: A bank can operate with low cash reserves and thus reduce its
idle cash reserves in the group banking system. This is because it can be
easily transferred from one member bank to another member bank in case of cash
crunch.
Group
banking also has some disadvantages which are as follows:
(i)
Concentration of economic power: Group banking is a step towards monopoly
banking. In this system there is a possibility of concentration of economic
power in a few hands.
(ii)
Ineffective Management and Control: The system suffers from inefficient
management. The control of the holding company is indirect and more flexible.
Participant banks may not comply with the instructions and policies of the
holding company.
(iii) Chain
reaction: A chain reaction takes place in this system. In other words,
failure of one bank in the group adversely affects other member banks.
(iv)
Misappropriation of resources: There is a danger of diversion of funds of
the participating banks by the holding company to promote its own interest. In
such a situation, the member banks would face resource crunch, which would
adversely affect their operations.
5. What were
the causes of nationalisation of some Indian Banks? How does it help the
country? Exam paper: 2013
Ans: Some of
the reasons for nationalization of Indian banks are:
(i) To mobilize
the savings of the people to the maximum possible extent and utilize them for
productive purpose as per our plans and priorities.
(ii) ensuring
the operation of the banking system for a larger social purpose and subjecting
them to public regulations;
(iii) to meet
the legitimate credit needs of private sector industry and trade- big or small;
(iv) to prevent
the use of bank credit for speculation and other unproductive purposes;
(v) to develop
adequate professional management and modern managerial techniques and practices
in the banking sector;
(vi) providing
adequate training and fair conditions of service to bank employees;
(vii) expanding
the branch network of banks in all parts of the country; And
(viii) To reduce
regional and regional imbalances in banking and through that in economic
development.
6. What is
Lead Bank Scheme? State the effects of this scheme.
Ans: In
order to ensure accelerated rural development in the country, soon after the
nationalization of banks, the RBI constituted a committee in 1969 under the
chairmanship of Shri F.K.F Nariman. This committee recommended a scheme
involving commercial banks, co-operative institutions, Govt., and
quasi-governmental agencies in the areas of processing economic development. In
December 1969, this scheme was launched by RBI. This scheme came to be known as
the Lead Bank Scheme. Under this plan the country was divided into 336
districts and they were divided into major scheduled banks. These banks were
SBI and its seven associates, 14 nationalized banks and 3 private sector banks.
Objective:
(i) Opening of
bank branches in the allotted district.
(ii) To mobilize
the savings of the allotted district.
(iii) To extend
financial assistance/credit facilities for the development of the allotted
district.
(iv) Maintaining
liaison with the district administration and promoting district development
programmes.
(v) To
co-ordinate the activities of commercial banks, co-operative banks, and other
financial institutions in the allotted district.
Effect:
(i)
Identification of unbanked areas within the district was possible through the
Lead Bank Scheme.
(ii) L.B. Branch
expansion, supervision and guidance were found to be more effective after
induction. Plan.
(iii) It was
observed that, the country as a whole economy would be served by a well-organized
system of commercial banking and co-operative banking.
(iv) The Lead
Bank solves the problems of the district development program by conducting
suitable surveys and motivating suitable agencies.
(v) After the
introduction of Lead Bank Scheme, greater co-operation was found among
commercial banks, co-operative banks, other financial institutions, and
government officials.
7. Discuss
the evolution and growth of Commercial Banking in India. Exam paper: 2015
Ans: Modern
joint stock commercial banking in India dates to the early 19th century. The
early commercial banks were known as agency houses and were started by employees
of the East India Company. Bank offices were largely confined to the port
cities of Bombay, Calcutta and Madras (now Mumbai, Kolkata, and Chennai).
Agency houses were primarily trading establishments and combined banking and
trading functions. Many banks were established mainly by the English Agency
Houses based on unlimited liability.
Alexander and
Company established the first joint stock, The Bank of Hindustan, in Calcutta
in 1770. It was finished in 1832. Banks set up by agency houses failed due to
mismanagement and speculation. Therefore, to revive the situation, the East
India Company established the Bank of Bengal in 1809, the Bank of Bombay in
1840 and the Bank of Madras in 1843. These banks were known as Presidency
Banks. In 1860, it was passed allowing the establishment of banks on a limited
liability basis. The creation of joint stock banks was very slow from 1865
until the end of the 19th century. Some banks like the Allahabad Bank were
started during the last quarter of the 19th century. The Avadh Commercial Bank
and the flotation were followed by a banking crisis during 1913–17.
In 1920, the
"Imperial Bank of India Act" was passed to amalgamate the three
Presidency banks. The Imperial Bank of India was established in 1921 by merging
three Presidency banks. The bank was empowered to hold government funds and
manage the public debt.
The Second World
War brought a radical change in the Indian banking system. Heavy wartime
expenditure resulted in an increase in bank deposits. The banking scenario in
India completely changed after independence. The entire system registered rapid
progress. The change became possible with the passing of the Banking Regulation
Act 1949. This is a major milestone in the history of commercial banking in
India. This act was passed with the aim of strengthening and regulating the
banking system in India. The State Bank of India was established in 1955 by
nationalizing the Imperial Bank of India. In 1959, the State Bank of India and
its Associates Act was passed and accordingly the public sector banks were
expanded. Fourteen (14) major Indian commercial banks were nationalized in 1969
and six more banks were nationalized in 1980. National Bank for Agriculture and
Rural Development (NABARD) was established in 1982 for the development of
agriculture sector.
Another
development of banking institutions in India is the establishment of various
industrial development banks to facilitate industrial development and balanced
economic growth. Such institutions are IDBI, IFCI, LIC, ICICI, IDBI, SFC etc.
Exim Bank was
established in 1982 with the objective of financing and promoting India's
foreign trade.
8. Discuss
the management and basic functions of State bank of India. Exam paper: 2014, 2015
Ans Management:
SBI is managed by a Central Board of Directors consisting of a chairman. One
Vice-Chairman, Two Managing Directors, and Fifteen Directors. The chairman and
vice-chairman are appointed by the central government in consultation with the
RBI for a five-year term.
Functions:
Some of the major functions of SBI are discussed below
(i) Agent of
the Reserve Bank: The State Bank of India acts as an agent of the Reserve
Bank of India at all places in the country where the Banking Department of the
Reserve Bank does not have a branch. At such places, instead of the Reserve
Bank, it receives, collects, and remits money, securities on behalf of the
Government and transacts other business entrusted to it by the Reserve Bank.
(ii)
Acceptance of Deposits: SBI like any other commercial bank accepts deposits
from the public in various accounts.
(iii) Loan
Advances: SBI advances loans against eligible securities to its customers, traders,
and industrialists etc. These advances may be in the form of overdrafts, cash
loans, loans and advances, discounting of bills, call money etc.
(iv)
Investment and Borrowing: SBI invests in government securities and borrows
from the Reserve Bank.
(v) Deals in
Bills of Exchange: SBI draws, accepts, discounts, buys, and sells bills of
exchange.
(vi) Buying
and selling of gold and silver: SBI buys and sells gold and silver. To
invest its capital this bank can buy gold and silver and it can sell gold and
silver if the prices of these precious metals are increased in the market to
make profit.
(vii) Dealings
in Foreign Currency: SBI is an authorized agent for dealing in Indian
Rupees in foreign currencies and Rupees in foreign currencies.
(viii)
Transfer of Money: SBI undertakes to transfer money deposited by customers
from one place to another through cheques, drafts etc. easily from one state to
another
(ix)
Safeguarding of Precious Metals: SBI provides locker facility to the
customer for safekeeping of gold, silver, and valuable documents. For providing
this facility the bank charges locker rent from the customers who opt out of
this facility.
9. Discuss
the advantages and disadvantages of Branch Banking. Exam paper: 2016
Ans: Advantages
of Branch Banking: The important advantages of branch banking system are
discussed below:
(i) Immediate
expansion of branches: A branch bank can organize its new branches quickly
and economically.
(ii)
Stability: The branches command great financial resources. They can meet
the financial needs of multiple customers. Branches can also counter depression
and meet emergencies.
(iii) Fund
transfer facilities: Since the bank branches are spread all over the
country under branch banking, it is easier and cheaper to transfer money from
one place to another.
(iv) Economy
of Reserves: Branch banking ensures economy of cash reserves. Each bank is
dependent not only on its own reserves but also on the total of all branches
and hence one branch can draw upon the resources of another bank in times of
need. i.e., every branch can manage its affairs with less cash reserve.
(v) Proper use
of capital: The branch bank can make proper use of its financial resources.
If one branch of a bank has a lot of deposits but no opportunity for
investment, it can transfer its surplus funds to other branches, which can
profitably utilize such funds for trade and industry. Can
(vi) Increase
in Banking Facilities: Under branch banking, banking facilities can be made
available in all cities, towns, and even backward areas of the country.
(vii) Better
training to employees: As the banking function becomes more widespread,
under branch banking, the bank employees and officers get better opportunities
to gain knowledge and experience about various aspects of banking business in
the country.
Disadvantages
of Branch Banking: The disadvantages of branch banking are discussed below: -
(i)
Difficulties of Management, Supervision and Control: Since a bank has
hundreds of branches under this system, it leads to many difficulties in
management, supervision, and control of banking activities.
(ii) Lack of
Initiative: Under this system the bank branches suffer from complete lack
of initiative on the important banking problems faced by them. No branch of the
bank can take decisions on important problems without consulting the Head
Office.
(iii) Costly
With the opening of two many branches, the establishment expenditure and
maintenance charges are bound to increase.
(iv) Regional
imbalance: Under the branch banking system, financial resources collected
in small and backward areas are transferred to big industrial centres. It
promotes regional imbalance in the country.
10. Discuss
the advantages and disadvantages of Unit Banking.
Ans: Advantages
of Unit Banking: The advantages of unit banking are discussed below:
(i) Ease of
Management, Supervision and Control: Since the size of the bank is smaller
under unit banking, its management, supervision, and control are easier and
more convenient for the officials.
(ii)
Initiative in Business: Bank officers being fully conversant with the local
problems under the banking system can take initiative in taking important
decisions on various issues faced by the bank.
(iii) Not
neglecting local needs: Since the bank officials of a unit bank are well
acquainted with the local needs, they cannot neglect the needs of local
development.
(iv) No delay
in banking business: One of the major advantages of unit banking is that
there is no delay in taking decisions on important problems related to the unit
bank.
(v) Personal
Contact: The manager of a unit bank may have first-hand knowledge of the
locality and may establish personal contact with the people of that area.
Therefore, the manager can evaluate the creditworthiness of the borrowers and
meet their specific needs.
Disadvantages
of Unit Banking: The disadvantages of unit banking are discussed below:
(i) Costliness
and inconvenience in remittance of funds: Since the unit bank does not have
any branch at other places in the country, it must depend on correspondent
banks for effecting transfer of funds from one place to another. This makes the
movement of funds more expensive and inconvenient for businessmen.
(ii) Low
development of banking in small towns and cities: Unit banks are not able
to open unprofitable branches in the country as their financial resources are
already limited and they cannot afford to open branches in small towns and
cities.
(iii) Lack of
efficiency in banking business: Since the size of the unit bank is small,
it cannot afford to adopt the latest and most updated methods of banking, as a
result of which its efficiency is generally low. Side.
(iv) Inability
to face crisis: The financial resources of a unit bank are relatively
limited. Hence, it finds itself unable to face the economic crisis.
(v) Personal
contacts a risk: The manager of the bank cannot deny credit facilities to
some influential persons even though they may not be creditworthy because of
their personal relations with the local people. If the banker lends, there is a
risk of non-payment and he may become unpopular in the area if he refuses.
11. Briefly
discuss the functions of Lead Banks.
Ans: The most
important functions of the are discussed below:
(i) To survey the
resources and potential for banking development by identifying unbanked centers
in the allotted districts.
(ii)
Identification of unbanked development centers for branch expansion on a phased
program basis.
(iii) To survey
the number of industrial and commercial units and other establishments which do
not have banking accounts or are mainly dependent on moneylenders.
(iv) To develop
an integrated credit scheme by examining the lack of marketing facilities for
agricultural production, and industrial production, storage of fertilizers and
other agricultural inputs and other services meeting local needs.
(v) Recruiting
and training banking staff to provide counselling to small borrowers and
farmers in priority areas and to supervise and monitor land-use-loans.
(vi) Providing
assistance to other primary lending agencies.
(vii) Maintaining
regular contact and contact with both government and semi-government agencies.
Therefore, there
is a need for the lead banks to prepare and implement area planning. They have
to integrate their flagship plans with the district plans for effective
delivery of credit along with expanded banking facilities according to local
needs.
12. Describe
the objectives of Bank Nationalisation in India.
Or
State the
purposes of nationalisation of bank. Exam paper: 2005, 2015
Ans: The
basic objectives behind the nationalization of banks can be discussed as
follows:
(i) Removal of
control over commercial banks by certain industrial houses.
(ii)
Diversification of the bank's flow towards priority sectors like agriculture,
small scale industries and exports, weaker sections, and backward areas.
(iii) To promote
new classes of entrepreneurs so that economic growth can be sustained and
accelerated.
(iv) Providing
proper terms and conditions of services as well as training to the bank
employees.
(v) To expand
banking facilities in unbanked rural areas.
(vi) To ensure
the operation of the banking system for a larger social purpose and to subject
them to public regulation.
(vii) To curb the
use of bank credit for speculative and other unproductive purposes.
(viii) To
mobilize the savings of the people to the maximum possible extent and to
utilize them for productive purposes according to their plans and preferences.
(ix) To develop
adequate professional management and modern managerial techniques and practices
in the field of banking system.
(x) To make
available adequate credit to private sector industry and trade. Whether big or
small.
(xi) To reduce
regional and regional imbalances in the country.
13. Discuss
the performance of Commercial Banks after nationalisation. Exam paper: 2003, 2011
Or
Discuss the
progress / achievements of nationalisation of Commercial Banks.
Ans: Various
progress or achievements of commercial bank nationalization are discussed
below:
(i) Expansion of Bank Branches:
There has been rapid expansion of bank branches mainly commercial banks not
only in urban or urban area but also in rural areas which were neglected by
commercial banks before nationalization. At the end of June 1969, there were
only 8262 shakhas, the number of shakhas increased to 32,643 in June 2003.
Thus, we can say that after nationalization there was a rapid expansion of
branches in different parts of the country.
(ii) Increase in Deposits:
Deposit mobilization of public sector banks after nationalization was another
important achievement. The main reason for deposit collection was the expansion
of branches at various places. Modern technology of deposits adopted by the
bank and the number of deposit accounts increased.
(iii) Expansion of Credit:
After the nationalization of banks, banking facilities have expanded in rural
areas, for which there has been a significant increase in the amount of
deposits in rural areas. Banking habit among rural people improved in terms of
deposits and loans.
(iv) Priority Sector Leading:
Greater emphasis has been laid on credit delivery to the priority sector which
includes agriculture, small scale industries, small businesses, small
businesses etc.
(v) Development of Management:
Commercial banks have taken up management development programs to meet the new
technologies of the banking system through nationalization of commercial banks.
The entire management structure of all the commercial banks has been changed
leading to better decision making through new techniques of management and the
process of delegation down the line.
(vi) New Scheme: Nationalization
of banks has provided an important role in the implementation of various
anti-poverty programs of the government such as the Integrated Rural
Development Program (IRDP). Apart from this, regional imbalances were
comparatively reduced through the nationalization of banks.
14. Discuss
the rules framed by the Reserve Bank of India for licensing of new banks in the
private sector.
Ans: Under
Section 22 of the Banking Regulation Act 1949, the following terms/conditions
have been framed by the Reserve Bank of India for licensing of new banks in the
private sector:
(i) A company is
able or will be able to pay its depositors, present or future, in full as per
their claims.
(ii) the affairs
of the company are not being or are not likely to be conducted in a manner
prejudicial to the interest of the present or future depositors.
(iii) the
general character of the proposed management of the company shall not be
prejudicial to the public interest over the interest of its depositors.
(iv) The company
has adequate capital structure and earning potential.
(v) The public
interest would be served by the grant of a license to the company to carry on
the business of banking in India.
(vi) The
carrying on of banking business in India by a company shall not be prejudicial
to the public interest or the interest of the depositors.
(vii) RBI should
also be satisfied that the banking company is not discriminated against by the
government or the lower classes of the country and that the company will comply
with all the provisions of the law applicable to banking companies.
15. What is
commercial Bank? Briefly explain its functions.
Or
Discuss the
commercial banking functions of receiving deposits and lending of money. Exam paper: 2002, 2013, 14, 15
Ans: Commercial
banks pool together the savings of the community and arrange for their
productive use. They supply the financial needs of modern business. They accept
deposits from the public which are repayable on demand or at short notice. They
cannot invest their money in long term securities or loans. Their business is
confined to financing short term requirements of trade and industry. They
provide working capital required by business and industry in their daily
transactions. They cannot supply the block capital required for the purchase of
fixed assets.
Functions
of Commercial Bank: The basic functions performed by commercial banks are
explained below:
(A)
Accepting Deposits: The primary function of a commercial bank is to accept
deposits from the public. People consider it more rational, because by doing so
they earn interest on the one hand and avoid the risk of theft on the other.
Banks maintain different types of accounts to attract savings from all types of
individuals –
(i) Fixed
Deposit Account: In these accounts money is deposited for a fixed period
(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 as compared to other
accounts. The longer the tenure, the higher the interest.
(ii) Current
Deposit Account: These accounts are generally maintained by merchants and
traders who must make several payments every day. Depositors can withdraw from
these accounts as many times as they can deposit. Normally no interest is paid
on this account.
(iii) Savings
Deposit Accounts: The objective of these accounts is to encourage and
mobilize small savings of the public. Certain restrictions are placed on the
depositors regarding the number of withdrawals and the amount that can be
withdrawn in each period. Check facility is provided to the depositors. The
rate of interest paid on these deposits is lower as compared to fixed deposits.
(iv) Recurring
Deposit Account: These accounts are aimed at encouraging regular savings by
the public, especially 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 almost the same as that of fixed deposits.
(B)
Lending: Another important function of a commercial bank is to lend to the
public. After keeping a certain amount of cash reserves, the bank lends its
deposits to the needy borrowers. Bank advances can be granted to customers in
the following ways:
(i) Overdraft: It is an
arrangement under which a customer is allowed to overdraft temporarily from his
current account. This is without any protection. The customer is charged
interest on the overdrawn amount.
(ii) Discounting of Bills of
Exchange: This is another type of loan granted by the banks. Through this
method, the holder of the bill of exchange can encash it by the bank. In a bill
of exchange, the debtor accepts the bill drawn on him by the creditor and
agrees to pay the stated amount on maturity. After making some nominal
deductions, the bank pays the value of the bill to the holder. When the bill of
exchange matures, the bank receives its payment from the party who accepted the
bill. Thus, such a loan is self-liquidating.
(iii) Cash Credit: It is an
arrangement by which a banker allows his customer to borrow money up to a
certain limit against the security of goods.
(iv) Loan: It is a type of
advance granted with or without security. It is given for a fixed period at an
agreed rate of interest. The loan amount is usually deposited in the account of
the customer who can withdraw from there as per his requirements. Loan can be
secured or unsecured.
(C) Use of
Check System: Banks provide a very useful facility to the customers by
allowing them to use cheques. In modern business transactions, the use of
checks for settlement of debts has been found to be more convenient than the
use of cash.
(D) Credit
Creation: The main function of a commercial bank is to create credit.
Contagion is a natural consequence of credibility building.
Procedure for
advancing the loan adopted by the banks. When a bank gives a loan to a
customer, it does not lend cash, but opens an account in the name of the
borrower and deposits the loan amount into this account. Thus, whenever a bank
gives a loan, it creates bank deposits of the same amount. The creation of such
deposits is called credit creation, which results in a net increase in the company's
money stock.
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