AHSEC| CLASS 12| FINANCE| CHAPTER - 1| COMMERCIAL BANKING IN INDIA| SOLVED QUESTIONS FOR 4/5 MARK EACH| H.S. 2ND YEAR
commercial banking in india
(C) SHORT ANSWER:
1. Discuss about
the origin of commercial banks in India.
Ans: The origins
of commercial banking can be traced back to the earliest times of human
history. The practice of keeping precious metals and coins in safe places and
lending money at interest for public and private purposes was prevalent in
ancient Rome and Greece. In England, banking originated with the London
goldsmiths, who began accepting deposits from merchants and others in the 17th
century for the safekeeping of money and other valuables. As a public
enterprise, banking made its first appearance in Italy in 1157, when the Bank
of Venice was established.
2. Write
about the functions and management of Imperial Bank.
Ans: Management:
Under the Imperial Bank of India Act 1920, the bank was managed by a central
board of directors. There were three local boards in the three Presidency
towns. The local boards had wide powers for the management of local trade. They
were under the control of the Central Board.
Functions: Until
the establishment of the RBI in 1935, the Imperial Bank performed some central
banking functions, although it was purely a commercial bank. It acted as the
sole banker to the government. It was the custodian of public money and
government cash balances and performed all treasury functions. Most commercial
banks kept their balances with the Imperial Bank and so it functioned as a
banker's bank. In addition to central banking functions, the Imperial Bank also
performed general commercial banking functions. It accepted various types of
deposits from the public and provided loans to the public based on personal and
collateral securities. It also provides other commercial banking functions such
as remittance of money from one place to another, receiving customer's
valuables for safe custody and other miscellaneous services.
3. Write a
short note about State Bank of India.
Exam paper: 2002, 03, 05, 12
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
on the basis of 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. State
Bank of India did all the work. done by a commercial bank. In addition, the
State Bank of India performed as an agent of the Reserve Bank of India where
there is no branch of the Reserve Bank of India.
4. State the
different Central Banking functions of State Bank of India. Exam paper: 2008, 2015
Ans: Central
Banking Functions: State Bank of India performed many functions on behalf of
Reserve Bank of India which are given below -
(i) It acts as an
agent of RBI where the Reserve Bank does not have any branch.
(ii) It receives
money on behalf of the State Government and the Central Government and makes
payments on behalf of both the Governments.
(iii) It buys and
sells securities on behalf of the government.
(iv) It receives
deposits from commercial banks and state co-operative banks and in turn lends
to them.
(v) It acts as a
clearing house in places where RBI does not have any office.
5. Write a brief note on Lead Bank Scheme. Exam paper: 2002, 04, 06, 10, 15
Ans: Lead
Bank Scheme provides a new strategy of banking and area development in the
branch expansion program of the bank in the post nationalization phase of banking
development in the country.
The idea of Lead
Bank Scheme was mooted by the Gadgil Study Group of the National Credit Council
in October, 1969. Realizing the efficiency of banking facilities in rural
areas, the Gadgil Study Group recommended adopting an area approach for
developing schemes and programmes. To develop an adequate banking and credit
infrastructure in rural areas. This idea was further supported by F.K. The F.
Nariman Committee (Bankers' Committee on Branch Expansion on Programs of Public
Sector Banks) submitted its report in November 1969. obligations.
Following the
recommendations of these two committees, the Reserve Bank of India introduced
the "Lead Bank Scheme", in which 398 districts were allotted to a
public sector and one to a private sector bank. They were to play the role of
leaders in banking development.
Under the Lead
Bank Scheme, Lead Banks undertook the responsibility of surveying and
developing the banking potential of all the districts of the country. A
particular bank was made responsible for a particular district for the banking
and credit that developed in that district.
6. What are
the objectives of Lead Bank Scheme?
Ans: The
objectives of the Lead Bank Scheme are given below:
(i) The main
objective of the Lead Bank Scheme is that individual banks take responsibility
in a particular district for intensive economic development through planned
mobilization of funds and deployment of credit.
(ii) To act as a
leader to bring about coordination between co-operative banks, commercial banks,
and other financial institutions in their respective districts.
(iii) The lead
bank also lays emphasis on identification of unbanked area for expansion of
bank branches within the district.
7. What are
the benefits or effects of Lead Bank Scheme? Exam paper: 2013
Ans: Following
are the important benefits of the Leading Bank Scheme:
(i) It was
envisaged that the entire country would be served by a well-organized system of
commercial banking and co-operative banking.
(ii) Branch
expansion, supervision and guidance were found to be more effective after the
introduction of the Lead Bank Scheme.
(iii) After the
introduction of Lead Bank Scheme, greater co-operation was found among
commercial banks, co-operative banks, other financial institutions, and
government officials.
(v) The Lead Bank
clears up the problems of the District Development Program by initiating
suitable surveys and motivating suitable agencies.
(iv)
Identification of unbanked areas within the district was possible through the
Lead Bank Scheme.
8. Explain
briefly about the different forms of banking system.
Ans: The
different forms of banking system are discussed below:
(i) Branch
Banking: Under the branch banking system, a large bank as a single entity
and under sole proprietorship operates through a network of branches spread all
over the country. First branch banking was developed in England. Later it
became popular in other countries like Canada, Australia, India etc.
The branch
banking system is represented by the head office which is a nodal point where
all co-ordination functions take place and several branches which have
operational independence but all operations and policy matters are controlled
by the head office. All branches and head office are single owned by the Board
of Directors. The board of directors is elected by the shareholders. The branch
manager of each branch looks after the administration. The branch manager is
also the guide, director, and controller of the head office.
(ii) Unit
Banking Under the unit banking system, an individual bank operates through
a single office. Unit banks are usually small in size and area of operation and
have limited capital. A unit bank may not have any branch in many places, but
the unit bank has reciprocal arrangements with other similar banks in other
cities. The ownership of the Unit Bank is vested with its shareholders. The
unit banking system may combine with larger banks for its deposit and banking
operations.
(iii)
Conglomerate Banking: Conglomerate banking refers to that system of banking
in which two or more banks are directly controlled by a corporation, a consortium,
or a business trust. It is a system where a group of banks are brought under
the control of a holding company. Although each bank maintains its own separate
entity, its business is managed by the holding company. Group banks are more
popular outside India.
The purpose
of group banking is:
(a) Achievement
of economics of operation on a large scale.
(b) Integration
of the management of banks.
(c) to grab more
power.
(iv) Chain
Banking: Chain banking refers to the system where two or more banking
companies are controlled by one or four persons or by the same group of persons
through purchase of shares of such bank. In chain banking system, there is no
intervention or control by the central organization. Chain banks are more
popular outside India as well.
9.
Distinguish between branch banking and unit banking. Exam paper: 2010, 2014
Ans: Difference
between Branch Banking and Unit Banking:
|
Basis |
Branch banking |
Unit banking |
|
management
supervision and control |
Since a bank
has hundreds of branches under this system, it leads to many difficulties in
management. |
Since the
size of the bank is smaller under unit banking, it is easier to manage,
supervise and control and have more supervision and control. convenient for
the officers. |
|
initiative in
business |
Under the
branch banking system, no branch of a bank can take decisions on important
problems without consulting the head office. |
Under the
unit banking system, since the bank officials are fully conversant with the
local problems, they can take initiative in taking important decisions on
various issues faced by the bank. |
|
non-profit
branches |
Under branch
banking, the weak and unprofitable branches continue to be fed by the strong
and profitable branches of the bank. |
In contrast,
under unit banking, if a bank incurs losses, it will automatically cease to
exist after some time. |
|
transfer of
funds |
Under branch
banking, since bank branches are spread all over the country, it is easier
and cheaper to transfer funds from one place to another. |
But, under
unit banking, since the unit bank does not have any branch at other places in
the country, it must depend on correspondent banks to affect the transfer of
funds from one place to another. This makes funding more expensive and
inconvenient for businessmen. |
|
neglect of
local needs |
Under the
branch banking system, the needs of local development are generally neglected. |
But, under
Unit Banking System, since the bank officials are fully conversant with the
local needs, they cannot ignore the needs of local development. |
|
Growth of
banking in small towns and cities |
Under branch
banking, a large bank can open branches in smaller cities and towns, even if
it incurs losses in the process. |
But 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 cities and towns. |
10.
Distinguish between Public sector and Private sector banks. Exam paper: 2004
Ans:- Difference
between Public Sector and Private Sector Banks:
|
Public Sector Banks |
Private Sector Banks |
|
Public sector banks are owned, managed, and controlled by the
government. |
On the other hand, private sector banks are owned, managed, and
controlled by private individuals or common citizens. |
|
In public sector banks more than 50% capital or full capital is
supplied by the government. |
But, in private sector banks, all the total capital is supplied by
the shareholder of the banking company i.e., private individuals. |
|
The profit earned by public sector banks goes to the government. |
But in case of private sector banks, it goes to the shareholders of
the bank. |
|
The necessary staff in public sector banks is appointed by the
government. |
But in case of private sector banks the required staff are appointed
by the owner of the banking company. |
11. Briefly
explain the agency services rendered by commercial banks. Exam paper: 2003, 2006, 2010, 2013, 2015
Ans: The
various agency services provided by commercial banks are discussed below:
(i) Remittance
of Money: Banks help their customers to transfer money from one place to
another through cheques, drafts etc. Collection and Payment of Credit
Instruments: Banks collect and pay various credit instruments such as cheques,
bills of exchange, promissory notes etc.
(ii)
Collection and Payment of Credit Instruments: Banks collect and pay various
credit instruments such as cheques, bills of exchange, promissory notes, etc.
(iii) Buying
and selling of securities: Banks buy and sell various securities like
shares, stocks, bonds, debentures etc. on behalf of their customers. Banks
neither advise their customers about these investments nor charge them for
their service, but only act as a broker.
(iv) Income
Tax Consultancy: Sometimes bankers engage income tax experts not only to
prepare income tax returns for their customers but also to help them in getting
refund of income tax in appropriate cases.
(v) Acting as
Trustee and Executor: Banks preserve the will of their customers and make
them executors after their death.
(vi) Acting as
representative and correspondent: Sometimes banks act as representative and
correspondent of their customers. They receive passports, passengers, tickets,
safe passage for their customers and letters on their behalf.
12. Write a
short note on Scheduled bank. Exam
paper: 2008
Ans: Banks
listed in the Second Schedule under Section 42(b)(a) of the Reserve Bank of
India Act 1934 are called Scheduled Banks. These banks have been included in
the Second Schedule subject to the following conditions and the fulfilment of
these conditions by these banks:
(i) The bank
should have Rs.5 lakh as paid-up capital and reserve fund.
(ii) It should
be a corporation but not a partnership firm or a sole proprietor firm.
(iii) The bank must
submit its weekly returns to the Reserve Bank of India.
(iv) Direct
control is exercised over the scheduled banks and the Reserve Bank of India by
providing the following advantages:
(i) providing
direct lending, (ii) providing transfer facilities, (iii) providing clearing
house facility.
13. Discuss
the principles followed by the commercial banks in granting loans and advances.
Exam paper: 2016
Ans: The
principles of sound lending by commercial banks are:
(i) Security:
The first and foremost principle of lending is to ensure the security of the
money lent. This means that the borrower can repay the loan along with interest
as per the terms of the loan agreement. Repayment of the loan depends on the
borrower's (i) ability to pay and (ii) willingness to pay. Hence the banker or
the business must take utmost care in ensuring that the venture for which the
loan is sought is a good one and that the borrower can carry it out
successfully.
(ii)
Liquidity: Banks are essentially intermediaries for short term funds.
Hence, they lend funds for short term and mainly for working capital purposes.
Hence, loans are mainly payable on demand. The banker must ensure that the
borrower can repay the loan on demand or within a short period.
(iii)
Profitability: Commercial banks are profit making institutions. They should
employ their funds profitably to earn sufficient income out of which to pay
interest to depositors, pay salaries to employees and meet various other
establishment expenses and distribute dividends to shareholder. The sound
principles of lending for high profitability do not sacrifice safety or
liquidity.
(iv) Purpose
of the loan: Before giving the loan, the banker should check the purpose
for which the loan is sought. If the loan is given for a productive purpose,
the borrower will be more profitable and will be able to repay the loan.
(v)
Diversification: An important principle of lending is “diversification”.
While giving loans, the banker should follow the principle of diversification.
Accordingly, the banker should not give a major portion of the loan to one
individual or firm or one industry If the banker gives loans and advances to a
number of firms, individuals or industries, the banker will not incur heavy
losses even if a particular firm or industry does not repay the loan.
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