Banking theory, law and practice - [PDF document] (2023)

Theory of banking Law and practice Development of banks Activities of commercial banks Balance sheet of commercial banks Creation, organization and structure of banks Individual banks and mixed banking Prohibition of the public and private sectors

Banking theory, law and practice

BBA 2.1 Theory of Banking Law and practice

Development of banks Functions of commercial banks Balance sheet of commercial banks Creation of loans,

Organization and structure of banks Stand-alone banks and mixed public and private sector banks Nationalization of commercial banks Facility Progress.

Features of the development of the central bank. Credit Control Measures

Money market Facts about the Indian money market Characteristics of a developed and underdeveloped money market.

Banker & Customer General & Special Relationships Tradable Instruments Features Account Types Client Types BookCheque Pass Crossing Features Annotations

Banker's duty holder in a timely manner. Payment during court protection. Banker's protection against collection of duties

Reference texts and books:

1. Basu: Theory and practice of development banking2. MuranjanS.K. :Modern Banking in India3. Reddy and Appanniah: Theory and Practice of Banking 4. Natarajan and Gordon: Theory and Practice of Banking

Lesson 1 Development of banking Development of banking institutions

The origin of the word bank. Opinions on this vary. According to some authorities, the word Bank itself comes from the words bancus or banqee, meaning a bench. The first bankers, Jews in Lombardy, did business in stalls. When the banker fell, his little table was broken by people, hence the word "bankrupt". However, this etymology is ridiculed by Macleod in the land of the Ages. Others believe that the word bank originally comes from the German word back for share capital, which was translated into Italian as banco when the Germans were the rulers of most of Italy. This seems more likely. However, regardless of the origin of the word bank, as prof. Ramchandra Rao (Modern Banking in India, 1st ed., p. 88), he will trace the history of banking in Europe from the Middle Ages. The Early History of Banking As early as 2000 B.C.E. The Babylonians developed a banking system. There is evidence that the temples of Babylon served as banks, and that such great temples as those at Ephesus and Delbus were the most powerful Greek banking institutions. However, the spread of religion soon destroyed social security by depositing money and valuables in temples, and priests ceased to act as economic agents. The Romans did not organize state-owned banks like the Greeks, but their fine regulations regarding the conduct of private banking were intended to inspire the highest confidence in it. With the end of ancient co-rule and as a result of administrative decentralization and weakening of government power, with its inevitable counterpart of commercial insecurity, banks degenerated into a system of makeshift finance for several centuries. But that wasn't the only reason. Old prejudices are indestructible, and Aristotle found it unnatural to accuse of the unimportant and therefore fanatically followed. Even now some Mohammedans, obeying the injunctions of their religious books, refuse to accept interest on loans. The adherents of Aristotle's saying have forgotten that the ancient world, including the Jews, though they must have considered the banking system to be sufficient from a modern point of view, kept usurers and did not commit the sin of interest, but only usury. However, with the revival of civilization, increasing necessity forced the issue in the mid-12th century, and banks were established in Venice and Genoa, which did not actually become banks as we understand them until much later. Again, the roots of modern banking can be traced back to the money merchants in Florence who received money on deposit and were money lenders in the 14th century, and the names of Bardi, Acciajuoli, Peruzzi, Pitti and Medici soon became famous throughout Europe. world Europe as bankers. Florence is said to have had eighty bankers at one time, though it boasted no public bank.

The development of British banking The Royal Exchanger in England, founded during the reign of Edward III, money changers - an important function of bankers at the time - was taken over by the Royal Exchanger for the benefit of the Crown. He exchanged various foreign currencies, offered my travelers and his merchants entry into the kingdom with British money, and on the other hand provided those leaving the country with the foreign money they needed. it was prepared for modern banking in England by the influx of gold from America in the Elizabethan era and the concomitant expansion of foreign trade. Land was no longer the only form of wealth, and rural rulers and urban merchants began to keep some of their capital in cash. Public banking was revived with the confiscation by Charles I in 1640 of 130,000 bars left for safekeeping by the city's merchants at the Royal Mint. As a result of this royal repudiation, the merchants began to entrust large sums of money to their treasurers, but they misused their masters' money for their own gain. Finding that the officials treated them no better than the king, the city's merchants decided to keep their money with the goldsmiths, who had treasuries at the time and employed guards.

Earlier resumption of the issue of banks and deposits - in this way, large sums of money remained with goldsmiths to be stored behind signed receipts, called gold notes, which were an expression of the obligation to return money to the depositor or bearer on demand. Two developments quickly followed, forming the basis of Issuance and Depository Banking, respectively. First, goldsmiths marked the bocmome due to the bearer and thus converted it from a receipt to a banknote. It was payable on demand and had a considerable circulation. Second, the goldsmiths gradually discovered that large sums of money remained in their possession for long periods of time, and following the example of the Dutch bankers, they found it safe and profitable to borrow money outside their customers' borders, provided that such loans were made quickly specified time. Moreover, realizing that the business of borrowing other people's money at interest is profitable, and in order to attract larger sums, the more enterprising goldsmiths began to offer interest on the money deposited with them, instead of charging for their services in protecting the gold of their clients This is an important step in the development of the banking sector in England. The business grew to such an extent that it soon became clear that a goldsmith could always set aside a certain percentage of his cash for loans, regardless of the expiration date of his notes. As long as his credit remained good, he could calculate, according to the law of averages, the amount of gold needed to meet the daily needs of his holders and depositors.

Current account. The development of English banking met with a sharp setback in 1672. Charles II borrowed heavily from goldsmiths and immediately, like his father, renounced his debts. A crisis followed, followed by a general suspension of payments. Confidence, however, returned despite the shock and the widespread belief that the goldsmiths had committed careless and extravagant practices. Not long after that date, goldsmiths discovered that they could receive money on a so-called current account, that is, withdraw money without notice.

Early development of joint-stock banks in India The beginnings of modern banking in India date back to 1770, when the English Agencyhouse of Alexander & Co in Calcutta established the first joint-stock bank called Hindustan Bank. The bank, however, ceased operations in 1832.

Presidential Banks The real development of modern commercial banking began in the country when the government realized the need for banks in 1806 with the establishment of the first Presidential Bank in Calcutta, known as the Bank of Bengal. Two other presidential banks followed, namely the Bank of Bombay in 1840 and the Bank of Madras in 1843. In each of these banks, the government subscribed rupees. 3 lakhs in their share capital. However, a significant part of their share capital was contributed by European shareholders. These Presidency Banks, however, enjoyed a state banking monopoly. They were also granted the right to issue notes in 1823, but this was revoked in 1862. These three presidential banks operated until 1920. In 1921, they were merged into the Imperial Bank of India.

Indian joint-stock banks

The year 1860 is a breakthrough year in the history of public banking in India, because this year the principle of limited liability was introduced for the first time in joint-stock banks. From 1860 until the end of the 19th century, some Indian joint-stock banks did not exist. For example, Bank Allahabad was established in Allahabad in 1865. In 1875, Alliance Bank of Simla was established. In 1889, another Indian bank was founded, called Oudh Commercial Bank. In 1895, the famous National Bank of Punjab was established. Inspired by the Swadeshi Movement, several Indian entrepreneurs ventured into modern banking. Thus, during the boom of 1906-1913, banks developed. Many major banks were also established during this period. These were Bank of India (1906), Canara Bank (1906), Bank of Baroda (1908) and Central Bank of India (1911). Offshore Banks In addition to Indian joint-stock banks, some international foreign banks known as listed banks, based in their home countries, have entered the Indian banking system. The purpose of foreign exchange banks was basically to finance the country's foreign trade, but they also carried out banking activities, competing with Indian banks. Listed banks are called offshore banks because they were funded and managed by non-Indians.

The Banking Crisis Until around the middle of the 20th century, Indian joint-stock banks had a tumultuous career in the country. The banking sector experienced major setbacks in 1913-17, with 108 banks failing, and another 373 banks failing in 1922-36, followed by another 620 bank failures in 1937-38. The Central Bank Inquiry Commission (1929) identified the following main causes of bank failure in India: (1) Insufficient capital and reserves, (2) Poor asset liquidity, (3) Combination of non-banking activities with banking operations. (5) Favoring managers for their vested interests; (6) Incompetent and inexperienced managers; (7) Bad management; (8) A dishonest manager; (9) Creation of long-term loans based on short-term deposits; (10) Pursuing speculative investments, (11) Ignorance of the world about banking activities, (12) Lack of coordination between joint-stock banks, (13) No central bank providing general supervision and control, (14) Lack of proper banking regulations governing the activities of banks.

And above all, the shaken public confidence in banks can be attributed to the overtime failure of many Indian commercial banks. Another bank failure event occurred in 1946-47 with the collapse of A.B.C. Bank, Exchange Bank of India and Africa and Nath Banks. Finally, at independence (in 1947), India inherited an extremely weak, city-oriented banking structure consisting of 544 small irregular banks and 96 regular banks. Crowdfunding in commerce. Moreover, only a few of them were pan-Indian in nature, while most of them had a limited geographic scope of their activities.

Major Banking Changes/Reforms in the Planning Era After independence, the Indian government started financial planning in the country from 1951. In the last 37 years of planning, commercial banking has undergone a drastic transformation as a result of several major changes/reforms and government policy measures. The most important changes introduced in the Indian banking system include the following: (1) liquidation and merger of banks, (2) nationalization of the Reserve Bank of India, (3) banking legislation, (4) evolution of banking in the public sector through the nationalization of banks (5) Decrease in importance foreign banks (6) Structural changes in commercial banking (7) New strategies in banking.

Banking: Definition A banking company is defined as a company engaged in banking activities in India. The Banking Regulation Act defines the activities of the banking sector by specifying the basic functions of a banker. It also states that various other business banking firms may be involved in the case and prohibits it from setting up certain businesses. and may be revoked by check, bill or other order (Article 5(b))

The key features of this definition are as follows: (i) A banking firm must perform both primary functions, namely (a) taking deposits and (b) lending or investing. If the purpose of accepting deposits is not to lend or invest, the business will not be called a banking business. Explanations to Section 5(a) (c) clarify that any company engaged in the manufacture of goods or in any commercial activity and which accepts cash deposits from the public for the sole purpose of financing its activities, since it is not considered to be a producer or a seller to engage in banking operations. (ii) The expression "depositing money by the public" is significant. The banker accepts cash deposits and nothing else. The word public means that the banker accepts deposits from anyone offering their money for this purpose. However, the banker may refuse to open an account in the name of a person whom he deems undesirable, eg a thief, bandit, etc. Taking deposits should be a known profession of a banker. Lenders and local bakers are on their own and do not accept deposits from the public. If they ask their friends or relatives for money when needed, that money is not considered acceptable to society. (iii) The definition also specifies when and how deposits are withdrawn. The deposited money should be returned to the depositor at his request, in accordance with the agreement between the two parties. The main feature of banking is that the banker does not return the money himself, even if the deposit period expires. The depositor must request the same. The Act also provided that payment should be made by order, check, promissory note or otherwise. This means that the request must be made in an appropriate manner and by means of a document in writing, and not merely by verbal order or telephone message.

It is therefore clear that the basic principle of conducting business is that the funds collected as a result of taking deposits should constitute the main stream of funds intended for credit or investment purposes. The banker is therefore an intermediary and deals with the money that belongs to the public. A number of other institutions that also deal with money do not qualify as banking institutions because they do not meet all of the above conditions. Specialized financial institutions, e.g. Indian Industrial Finance Corporation and State Finance Corporation are not banks as they do not accept deposits in a certain way. The essence of banking activity lies in two main functions. It also follows from the definition given by Sir John Paget, an important authority in banking.

Sir John Pagets definition: According to Sir John Paget, a person other than an individual, corporation or other person can be a banker who (i) does not take deposits or accounts, (ii) maintains checking accounts, (iii) writes and pays checks and (iv) ) collects checks, cross and uncross, for its customers. This definition highlights the four main functions of banking. Sir John Paget also insisted on regular and recognized performance of these functions. According to him, whoever claims to be a banker must declare that he is one, and society must accept his status, his main occupation must be banking, from which he should be able to earn a living at all. The above function is considered to be the basic function of a banker, however, this definition does not include other functions currently performed by modern bankers.

The name must contain the word Bank, Bankier or Banking. Section 7 requires every bakery business in India to use at least one of the words - bank, banker, banker, banking or banking company as part of its name. Moreover, it prohibits any other company, individual or group of people from using any of these words as part of its name. Section 7 was amended in 1983 so that none of these words may be used at any corporate event in connection with its business.

Lesson 2

Activities of commercial banks

A commercial bank is a financial institution whose main activity is to accept deposits from the public and to grant loans to those who need it for short periods. The general functions of a commercial bank can be summarized as follows:

1. Taking deposits The most important function of commercial banks is to take deposits from the public. Commercial banks not only protect them, but also help transfer funds via checks and even pledge to illegally refund money. Permanent deposits or term deposits are established in the bank for a definite period of time and can be withdrawn only after this period has elapsed. The interest rate depends on the agreed term. The longer the maturity, the higher the interest rate and vice versa. From the point of view of security and interest, fixed deposits are preferred. Savings deposits are deposits taken with certain restrictions. For example, interest rates on savings deposits are usually lower, withdrawals can be made once or twice a week. Overdraft deposits, often called demand deposits, are deposits that the depositor can withdraw at any time without prior notice through checks. Banks do not pay interest on demand deposits, but they actually charge a small fee to current account customers. interest due after the due date. Caloric deposits where deposits can be withdrawn at the depositor's request, short-term deposits where depositors are required to give notice of withdrawal within a certain number of days (7, 21, 30, 45 or 90), short-term deposits for a short period of one year or shorter for deposits with lower interest rates and retirement benefits are just some of the important forms of deposits accepted by commercial banks.

2. Obtaining credits and loans The second basic function of a commercial bank is to grant credits and loans from public deposits. Instant loans and advances are granted to all persons against personal collateral, gold and silver and other movable and immovable property. Banks do this by means of overdrafts, i.e. allowing the borrower to indebted the current account, as well as by discounting promissory notes. Merchants and manufacturers managed to raise enough capital to produce goods and services. They help develop those industries that provide the most useful services to the community. Credits and loans provided by commercial banks come in various forms such as cash credit, overdraft, demand loan, rental loan, etc. installment commercial bank to secure raw materials, manufactured goods, etc. Overdraft is made to secure shares and shares, insurance policies, etc. in a current account. The demand loan is each time paid in full to the debtor. Installment loans are granted to all natural persons for the purchase of durable goods from the customer, such as a radio, bicycle, sewing machine, premises for buildings, etc.

3. Υπηρεσίες Αντιπροσωπείας Μια εμπορική τράπεζα παρέχει μια σειρά επενδυτικών υπηρεσιών. Οι πελάτες μπορούν να κανονίσουν την αποστολή μερισμάτων στην τράπεζά τους και την απευθείας κατάθεση στους τραπεζικούς λογαριασμούς τους, ή την αποκόλληση κουπονιών από τα ομόλογα στον κομιστή και την παρουσίασή τους για πληρωμές και την εκτέλεση ανακοινώσεων στον Τύπο για τραβηγμένα ομόλογα, κουπόνια πληρωτέα κ.λπ. Η αγορά ή η πώληση χρηματιστηριακών τίτλων διενεργείται μέσω των τραπεζικών μεσιτών, οι οποίοι θα γνωμοδοτούν και για τίτλους ή λίστες τίτλων. εγγραφές σε εκδόσεις κεφαλαίου που πραγματοποιούνται κατά τη διάρκεια μιας περιόδου), και τελικά να αποκτήσετε το πιστοποιητικό μετοχών ή άλλα έγγραφα τίτλου. Υπό ορισμένους συμφωνημένους όρους, οι τράπεζες θα επιτρέψουν να εμφανίζονται τα ονόματά τους σε εγκεκριμένα ενημερωτικά δελτία ή άλλα έγγραφα ως τραπεζίτες για την έκδοση νέων κεφαλαίων, θα λαμβάνουν αιτήσεις και θα εκτελούν άλλες οδηγίες. Μια εμπορική τράπεζα αναλαμβάνει την πληρωμή συνδρομών, ασφαλίστρων, ενοικίων και είσπραξης επιταγών, λογαριασμών , γραμμάτια κ.λπ., για λογαριασμό πελατών της. Λειτουργεί επίσης ως ανταποκριτής ή εκπρόσωπος των πελατών της, άλλων τραπεζών και χρηματοπιστωτικών εταιρειών. Οι περισσότερες από τις εμπορικές τράπεζες διαθέτουν τμήματα εκτελεστών και διαχειριστών. Ορισμένες μπορεί να έχουν συνδεδεμένες εταιρείες για να ασχοληθούν με αυτόν τον κλάδο της επιχείρησής τους. Στόχος τους είναι να παρέχουν, πριν, ένα πλήρες φάσμα υπηρεσιών διαχειριστή, εκτελεστή ή συμβουλευτικές υπηρεσίες με μια μικρή χρέωση. Η δραστηριότητα των τραπεζών που ενεργούν ως διαχειριστές, εκτελεστές, διαχειριστές κ.λπ., επεκτείνεται συνεχώς με σημαντική χρησιμότητα για τους πελάτες τους. Ορίζοντας μια τράπεζα ως εκτελεστή ή διαχειριστή της θέλησής του, ο πελάτης εξασφαλίζει το πλεονέκτημα της συνέχειας και αποφεύγει το ξύρισμα για να κάνει αλλαγές. αμεροληψία στις συναλλαγές με τους δικαιούχους και στην άσκηση της διακριτικής ευχέρειας· και τις νομικές και εξειδικευμένες γνώσεις που αφορούν τις υπηρεσίες εκτελεστών και διαχειριστών. Όταν ένα άτομο πεθαίνει χωρίς να συντάξει διαθήκη, ο πλησιέστερος συγγενής μπορεί να προσλάβει την τράπεζα για να ενεργεί ως διαχειριστής και να αντιμετωπίζει την περιουσία σύμφωνα με τους κανόνες που αφορούν την αδιαθεσία. Εναλλακτικά, εάν ένας διαθέτης συντάξει μια διαθήκη αλλά δεν διορίσει έναν εκτελεστή ή εάν ο εκτελεστής δεν είναι πρόθυμος να ενεργήσει, η τράπεζα μπορεί συνήθως να αναλάβει τη διαχείριση με τη συγκατάθεση των άμεσα ενδιαφερόμενων προσώπων. Οι τράπεζες θα ενεργούν αποκλειστικά ή από κοινού με άλλους σε αυτά τα θέματα, όπως επίσης και στην περίπτωση του διαχειριστή για μετοχές, μετοχικά κεφάλαια, ακίνητα ή άλλες επενδύσεις. Σύμφωνα με μια δήλωση εμπιστοσύνης, μια τράπεζα αναλαμβάνει την εποπτεία των επενδύσεων και τη διανομή του εισοδήματος. Οι επενδύσεις ενός πελάτη μπορούν να μεταφερθούν στην επωνυμία ελέγχου της τράπεζας, κάτι που της επιτρέπει να ενεργεί αμέσως μετά από ειδοποίηση ή έκδοση δικαιωμάτων, επιστολές κατανομής κ.λπ. διορισμός της τράπεζας ως πληρεξούσιου. Όταν η επιχείρηση περιλαμβάνεται σε κτήμα ή καταπίστευμα, μια τράπεζα θα φροντίσει για τη διαχείρισή της για περιορισμένη περίοδο, εν αναμονή της πώλησής της ως συνεχιζόμενη επιχείρηση ή μεταβίβαση σε δικαιούχο. Οι ιδιωτικές εταιρείες που επιθυμούν να δημιουργήσουν κεφάλαια ανόδου μπορούν να ορίσουν μια τράπεζα ως ένας θεματοφύλακας, διαχειριστής και σύμβουλος επενδύσεων, ενώ διατηρεί τη διαχείριση του συστήματος στα χέρια της διοίκησης του αμοιβαίου κεφαλαίου. Οι περισσότερες τράπεζες θα αναλάβουν για λογαριασμό των πελατών τους την προετοιμασία των δηλώσεων φόρου εισοδήματος και των απαιτήσεων για την είσπραξη του υπερπληρωμένου φόρου. Επίσης, βοηθούν τους πελάτες στον έλεγχο των αξιολογήσεων. Εκτός από τις συνήθεις αξιώσεις που αφορούν προσωπικά επιδόματα και ελαφρύνσεις, οι αξιώσεις συντάσσονται για λογαριασμό κατοίκων εξωτερικού, ανηλίκων, φιλανθρωπικών οργανώσεων κ.λπ.

4. General Public Services These services are services where bankers act as an agent for their client. These include issuing credit instruments such as letters of credit and travelers cheques, accepting bills of exchange, safekeeping of valuables and documents, concluding foreign exchange transactions, acting as an arbitrator in terms of creditworthiness and financial standing of clients, and providing specialist advisory services to clients. customers.

By selling bills of exchange or orders and issuing letters of credit, bank notes, traveller's checks, etc., the merchant banker performs a very important function. A banker's draft is an order from a bank's office to any of its branches, or from any bank to another, to pay a specified amount to the person concerned. A letter of credit is a document issued by a banker authorizing another banker to whom it is addressed to honor checks for a person named in the document in the amount specified in the document and debiting the banker's account with them Sponsorship letter of credit The letter of credit consists in the issuing banker's commitment to accept all bills of exchange within the limits credit cards. When the acceptance promise is conditional upon the receipt of documents proving title to the goods, it is called a documentary letter of credit. But the banker will still be responsible for accounts negotiated before the end of his currency period. A credit circular is generally intended for travelers who may need money in different countries. They can be divided into travel letters of credit and guaranteed letters of credit. A travel letter of credit contains an instruction from the issuing bank to its overseas agents to honor the recipients with cheques, cheques, etc. for a specified amount, which it undertakes to cover upon presentation. By issuing guaranteed letters of credit, the banker secures a guarantee of compensation at an agreed interest rate or may require sufficient collateral to grant credit, the banker secures a guarantee of compensation at an agreed interest rate or may require sufficient collateral to grant credit. There is another type known as revolving credit. In this letter, the letter is worded in such a way that the amount of credit available automatically reverts to the original amount after the accounts negotiated under it have been duly maintained.

Circular notes are checks issued to the baker issuing the baker for specified amounts in his own currency. On the reverse side of the circular is a letter addressed to agents identifying the holder's name and referring to the endorsement letter in his hands which includes the holder's specimen signature. No answer will be given unless a letter of reference is provided. Traveler's checks are documents similar to circular notes, with the difference that they are not accompanied by any cover letter. Round cheques are issued by banks in some countries to their agents abroad. These agents sell them to the intended visitors in the country of the issuing bank. Another important service provided by a modern commercial bank is the safekeeping of valuables such as negotiable instruments, jewelry, title deeds, wills, securities safe deposit boxes, etc. The branches are also equipped with specially designed vaults, each containing a large number of private steel safes of different size. They can be used by both non-customers for a small fee and regular customers. Each licensee receives a key to an individual safe, thanks to which he not only receives protection of his valuables, but also retains full personal control over them. Safe deposit boxes are available at all times during bank business hours and often longer. For shopkeepers and other customers who handle large sums of money after bank opening hours. Night safes are available at many banks. The night safe is a small metal door in the outer wall of the bank, accessible from the street, behind which there is a gutter connected to the bank's vault. Customers using this service receive a leather wallet which they close before inserting into the slot. The wallet is opened by the customer when he calls the bank the next day to pay for the contents of his account. Another important function for both the banker and the businessman is that of the arbiter of the dignity and financial situation of the client.

Among the services introduced by modern commercial banks over the last quarter of a century, bank accounts and credit cards deserve special attention. A bank giro is a system where a bank customer with multiple payments to make, instead of writing a check for each item, can simply instruct his bank to transfer the amount owed to his bank accounts and write a check debiting his account for the total amount. A credit note listing each creditor's name along with the name of the bank and branch will be cleared as part of the clearinghouse's credit settlement, which works in a similar way to clearing clearance. Even non-bank customers can take advantage of this option for a small fee. Some banks also offer a direct debit service. This service is designed to help organizations that regularly receive a large number of payments. Thus, the creditor has the possibility, with the prior consent of the debtor, to demand any money owed to him directly from the debtor's bank account. For some organizations, such as insurance companies, which receive, for example, six equal amounts in six in a given year, the program is simply an extension of the standing order line. however, for utilities and retailers who send invoices for variable amounts at different times, the system is completely new.

Credit cards are intended for use by creditworthy customers. Users receive a card upon presentation of which their signature is accepted on the accounts of stores and companies participating in the program. In this way, banks guarantee account coverage and recovery of funds from cardholders with a single, periodically presented bill. In some cases, users must also pay a regular subscription fee to use the service. Extending the program allows you to repay large amounts (at the maximum limit) over the period with interest.

Some banks open budget accounts for creditworthy customers. The Bank guarantees the payment of certain types of annual accounts (e.g. fuel bills, invoices, etc.) for a specified fee as soon as they become due, with repayment spread over a period of 12 months from the customer's current account. The new money transfer services take into account in particular the development of e-accounting that banks have already introduced in some countries. Some banks are reportedly experimenting with the use of electronic devices that scan checks and dispense notes or coins, saving time at the checkout.

Foreign Trade Services Recognition of foreign trade has prompted modern commercial banks to set up branches specializing in foreign trade finance, and some banks in some countries have become interested in export houses and factoring agencies. With the help of banks affiliated with them in overseas territories, they are able to provide a comprehensive network of services for foreign banking operations, and transactions can be carried out comprehensively by a domestic bank or its subsidiary. In places where banks are not directly represented by such affiliates, they have correspondent co-operation agreements allowing banks to undertake foreign banking operations anywhere in the world. at home and abroad for the goods they buy and sell; they are also creditors and enable the company to free up capital that would otherwise be trapped in exported goods.

5. Πληροφορίες και άλλες υπηρεσίες Ως μέρος των ολοκληρωμένων τραπεζικών υπηρεσιών τους, πολλές τράπεζες λειτουργούν ως βασικές πηγές πληροφόρησης για το εξωτερικό εμπόριο σε όλες τις πτυχές. Ορισμένες τράπεζες παράγουν τακτικά δελτία σχετικά με τις εμπορικές και οικονομικές συνθήκες στο εσωτερικό και το εξωτερικό, καθώς και ειδικές εκθέσεις για τα εμπορεύματα και τις αγορές. Σε ορισμένες περιπτώσεις καλούν όσους επιθυμούν να επεκτείνουν το εξωτερικό τους εμπόριο και είναι σε θέση μέσω των ανταποκριτών τους να παρέχουν τα ονόματα αξιόπιστων και ενδιαφερόμενων εμπόρων αγαθών και εμπορευμάτων και να συμβουλεύουν τον διορισμό κατάλληλων αντιπροσώπων. Για επιχειρηματικές δραστηριότητες που ταξιδεύουν στο εξωτερικό, μπορούν να εκδοθούν συστατικές επιστολές, οι οποίες αναφέρουν τον σκοπό του ταξιδιού που πραγματοποιήθηκε, που απευθύνονται σε τραπεζικούς ανταποκριτές στα διάφορα κέντρα που προτείνεται να επισκεφθείτε. Με αυτόν τον τρόπο καθίσταται δυνατή η δημιουργία νέων επιχειρηματικών οδών. Κατόπιν αιτήματος, οι τράπεζες λαμβάνουν για πελάτες, για επαγγελματικούς οίκους, εμπιστευτικές γνώμες σχετικά με την οικονομική κατάσταση εταιρειών, εταιρειών ιδιωτών στο εσωτερικό ή στο εξωτερικό. Οι εμπορικές τράπεζες παρέχουν συμβουλές και πληροφορίες εκτός του εμπορικού πεδίου απλώς. Εάν είναι επιθυμητό να δημιουργηθεί μια θυγατρική ή ένα υποκατάστημα στο εξωτερικό (ή μια εταιρεία στο εξωτερικό που θα ιδρυθεί στη χώρα καταγωγής), βοηθούν στη σύναψη συμβάσεων με τοπικούς τραπεζικούς οργανισμούς. Συνοψίζοντας, η υπηρεσία που παρέχεται από μια σύγχρονη εμπορική τράπεζα είναι ανεκτίμητης αξίας. Κινητοποιεί τη διάσπαρτη αποταμίευση της κοινότητας και την αναδιανέμει σε πιο χρήσιμα κανάλια. Επιτρέπει την πραγματοποίηση μεγάλων πληρωμών σε μεγάλες αποστάσεις με μέγιστο κόστος. Αποτελεί την ίδια τη ζωή μιας προηγμένης οικονομικής κοινωνίας. Σύμφωνα με τα λόγια του Walter Leaf: Ο Thebanker είναι ο παγκόσμιος διαιτητής της παγκόσμιας οικονομίας. Εμπορικές Τράπεζες και Οικονομική Ανάπτυξη Οι εμπορικές τράπεζες έχουν καταλήξει να διαδραματίζουν σημαντικό ρόλο στην ανάπτυξη των χωρών. Στην πραγματικότητα, χωρίς την εξέλιξη της εμπορικής τραπεζικής τον 18ο και τον 19ο αιώνα, η Βιομηχανική Επανάσταση δεν θα είχε λάβει χώρα στην Αγγλία. Θα είναι εξίσου αληθές να δηλωθεί ότι χωρίς την ανάπτυξη υγιούς εμπορικής τραπεζικής, οι υπανάπτυκτες χώρες δεν μπορούν να ελπίζουν ότι θα ενταχθούν στις τάξεις των προηγμένων χωρών. Διότι, η βιομηχανική ανάπτυξη απαιτεί τη χρήση κεφαλαίων που δεν θα είναι δυνατή χωρίς την ύπαρξη τραπεζών για την παροχή της απαραίτητης χρηματοδότησης για την απόκτηση κεφαλαίων. Εξάλλου, η βιομηχανική ανάπτυξη θα είναι αδύνατη χωρίς την ύπαρξη αγορών για τη διάθεση των παραγόμενων προϊόντων. Πώς όμως μπορούν να επεκταθούν οι αγορές χωρίς τις υπηρεσίες των εμπορικών τραπεζών; Σε αυτήν την ενότητα, θα ασχοληθούμε με τις σημαντικές υπηρεσίες που παρέχουν οι εμπορικές τράπεζες και θα δείξουμε πώς οι τράπεζες διαδραματίζουν σημαντικό ρόλο στην οικονομική ανάπτυξη των εθνών. (i) Οι τράπεζες είναι απαραίτητες για το εμπόριο και τη βιομηχανία: Όλη η οικονομική πρόοδος τα τελευταία 200 περίπου χρόνια βασίζεται στο εκτεταμένο εμπόριο και την εκβιομηχάνιση, η οποία δεν θα μπορούσε να πραγματοποιηθεί χωρίς τη χρήση χρημάτων. Αλλά χρήμα δεν σημαίνει κέρματα και χαρτονομίσματα, μόνο αφού αυτά αποτελούν μόνο ένα μικρό ποσοστό του συνολικού όγκου της προσφοράς χρήματος. Είναι οι τραπεζικές καταθέσεις στις οποίες μπορούν να εκδοθούν επιταγές που αποτελούν τις σημαντικές πηγές χρημάτων. Σε όλες τις μεγάλες συναλλαγές, οι πληρωμές δεν γίνονται με όρους χρημάτων, αλλά με επιταγές και επιταγές. Μεταξύ των χωρών, το εμπόριο χρηματοδοτείται μέσω λογαριασμών, οπότε οι συναλλαγές προεξοφλούνται (δηλαδή αγοράζονται) από τις τράπεζες. Χωρίς τη χρήση της τραπεζικής επιταγής, του τραπεζικού λογαριασμού και της συναλλαγματικής, το εσωτερικό εμπόριο και το διεθνές εμπόριο δεν θα μπορούσαν να αναπτυχθούν, η εξειδίκευση και η βιομηχανική ανάπτυξη δεν θα μπορούσαν να έχουν πραγματοποιηθεί. (ii) Οι τράπεζες βοηθούν την κατανομή των κεφαλαίων μεταξύ των περιφερειών: Ένας άλλος τρόπος με τον οποίο οι εμπορικές τράπεζες ενθαρρύνουν την παραγωγή και ενισχύουν το εθνικό εισόδημα είναι η μεταφορά πλεονασματικού κεφαλαίου από περιοχές όπου δεν είναι τόσο επιθυμητό, ​​σε εκείνες όπου μπορεί να χρησιμοποιηθεί πιο χρήσιμα και αποτελεσματικά. Αυτή η κατανομή κεφαλαίων μεταξύ των περιφερειών έχει ως αποτέλεσμα το άνοιγμα των καθυστερημένων περιοχών και την πληρωμή του δρόμου για την οικονομική τους ανάπτυξη.

(iii) Banks create credit and help businesses grow: Fluctuations in bank credit have a significant impact on the level of economic activity. Increasing bank credit will provide entrepreneurs with more capital and thus lead to more investment. Under conditions of full employment, the expansion of bank credit will result in inflationary pressure. But in conditions of unemployment, it will increase production in the country. On the other hand, a decrease in bank credit will cause a decrease in production, employment, sales and prices. From the point of view of an underdeveloped economy, the expansion of bank credit offering more finance to industries is one of the reasons contributing to greater economic growth.

(iv) Banks create debt money: A very important service that banks provide to society is the creation of demand deposits against the debts of others (ie short-term and long-term securities). Commercial banks buy debts of others that are not widely accepted as money, either because the debtors are not known enough or because their debts only become payable over time. Instead, they issue demand deposits, which are widely accepted as money. Thanks to these transactions, banks earn on debt. The importance of banks today stems from the fact that they are not only money peddlers but also, in an important sense, money makers. Bank money used to promote industry and commerce. It is rightly said that they have the power not only to determine the total amount of bankmoney in existence, but also to influence how that money is used.

(v) Banks promote the accumulation of capital: Commercial banks offer savings opportunities and thus shape people's economic and industrial habits. The mobilization of idle and idle community capital and its disposal for productive purposes. Economic growth depends on the diversion of economic resources from consumption to capital formation. A higher rate of saving and investment is therefore what constitutes real capital accumulation. In this, the role of banks is invaluable. But there may be other institutions in a country, such as insurance companies, that can help mobilize community savings for productive purposes.

(vi) Banks influence interest rates: Banks can also influence economic activity in other ways. They can affect the interest rate in the money market through the supply of funds. By offering more or less capital, it can have a strong impact on interest rates. In addition, it can also influence people to hold less bank money or more or less other assets. In this way, it can also affect interest rates. A policy of cheap money with low interest rates will stimulate economic activity if other conditions are favorable. In a developing country like India, the banking infrastructure is extremely inadequate. A huge number of villagers and caravans do not have access to banks, as a result of which all their savings go down the drain. Opening banks in these areas or expanding the banking facilities will help to mobilize savings in these areas, and put into the hands of entrepreneurs will start to be productive. Besides, in India, commercial banks have started to take over new functions to help private sector industries. They help arrange deferred payment agreements between Indian industrial units and foreign companies to enable the former to import machinery and other essentials. Thus, the banshave occupies an important place in the industrial and commercial life of the nation. A developed banking organization is a prerequisite for the country's industrial development./Lesson 3 Balance sheet of commercial banks

Bank's liabilities and assets: Balance sheet banking is a business unlike any other. An indication of the financial position of a business enterprise can be obtained by checking the statement of liabilities and assets, called the balance sheet. The balance sheet is always drawn up in two parts. It is customary to record liabilities in one section, usually on the left, and assets in the other section, on the right. Liabilities are debts or amounts of money that belong to other people. The bank's liabilities consist mainly of claims by shareholders, creditors and depositors. Assets, on the other hand, include items such as cash, receivables, loans and investments, etc. The balance sheet always balances out, but no single item necessarily matches another. We can easily understand this if we have a basic understanding of double-entry bookkeeping. Any change on one side of the balance sheet must be exactly offset by the same change in another item on the other side. Equality of assets and liabilities is not unique to banks. Every balance balances itself. But the business of banking is in a very specific sense balancing assets and liabilities. The bank acquires assets by directly increasing its liabilities, as opposed to other companies where liabilities are acquired indirectly as a result of a transaction. The first thing we want to know about the bank and its activities is the amount of its debts and loans.

Liabilities Liabilities on the bank's balance sheet are relatively simple. Liabilities are other claims against the bank. The liability page of the balance sheet shows how the bank raises funds to act as a debt and credit broker. The bank's liabilities usually consist of the following items:

(1) Equity: A bank's capital received from shareholders through the issue of various types of shares, such as ordinary shares, preferred shares, deferred shares, etc. The balance sheet may show the amounts of authorized capital, issued capital and paid-in capital. The bank's true shareholder potential, however, consists of the seed capital paid up and any accumulated retained earnings.

(2) Reserve fund: This is the amount accumulated over the years from retained earnings. The bank may use this capital to cover unexpected losses in certain years. Sometimes the bank is required to transfer part of its annual profits to a deposit fund, as long as the amount in the fund is not equal to the paid-in capital.

(3) Deposits: Public deposits account for the largest part of banks' working capital. Deposits are divided into demand deposits and term deposits. It is the former that generate most of the money supply for society. Based on their deposit liabilities, banks make loans and investments while maintaining a verified cash reserve ratio. Demand deposits are distinguished from time deposits. Term deposits are deposits that cannot be checked. Demand deposits arise from loans that the bank creates as a claim against itself. Simply put, a customer is said to have made a deposit when he gives cash or its equivalent to the bank and the bank grants him a deposit loan. A deposit is therefore a promise that a bank makes to a depositor in exchange for cash deposits. Cash in assets, deposit is a liability. The depositor is a creditor of the bank that lent him the money and can demand repayment at any time. (4) Interbank Loans: Liabilities arise when one bank temporarily borrows a loan from another bank. A large bank in particular may have liabilities not only on behalf of the general public but also on behalf of other banks in the country. The bank may also borrow from the country's central bank against eligible securities or obtain financial assistance in times of need or in the event of savings by discounting promissory notes.

(5) Account Liabilities: The Bank may have certain accounts which it pays from its resources. It may also accept specific bills from its clients for collection. The collected amount is transferred to customer accounts. So the amount under this item appears on both sides of the balance sheet. After collection, they become liabilities of the bank, but before collection, they should be treated as assets. Banks also accept promissory note endorsements on behalf of their customers, which simply means that the bank guarantees that the promissory notes will be paid on maturity. Thus, once a bank has accepted bills for customers, it is technically obligated to pay them when due, but since customers are expected to pay them and of course have provided adequate collateral, that customer's liability to the bank is an offsetting asset for the acceptance. In addition to the above, banks create a provision for contingent or contingent liabilities. The bank's profit also appears as a liability because it is payable to shareholders. However, it can be emphasized that the bank's assets are based on its liabilities. Banks, unlike other business organizations, acquire only a small part of their total assets by issuing capital requirements. Even more importantly, the size of capital requirements or equity varies slowly and within narrow limits relative to the bank's assets. Bank reserves, loans from other banks and the central bank are also very small relative to total assets. Most of the bank's assets are acquired by creating and granting bank loans in the form of deposit receivables. The amount of deposits issued by the banking system depends on its reserve requirements imposed by the central bank and the amount of foreign exchange reserves available to banks.

Assets We will now briefly describe the main assets of the bank in descending order of liquidity and in ascending order of profitability, and show how they reflect these two factors.

1. Cash balances The first asset in the portfolio of commercial banks' assets is cash in the bank itself and in the central bank of the country. In some countries, such as India, every commercial bank is required by law to keep a certain amount of cash in the form of deposits. Cash is called the bank's main reserve. From experience, the bank knows how much cash reserves it should maintain to meet depositors' demands. Some of this cash is held at the bank's headquarters, some with other commercial banks for interbank adjustments, and some as deposit with the country's central bank. A deposit with other commercial banks or with the central bank is considered cash by the commercial bank. In India, a commercial bank is legally required to hold a certain percentage of all deposits as cash reserves with the Reserve Bank of India. A bank's success depends on maintaining sufficient cash reserves to value checks presented by customers. However, only a small percentage of depositors can withdraw their deposits at any time through checks and other methods. At the same time, if some withdraw, others can make a deposit. Therefore, a commercial bank must adjust its operations so that the amount of cash flows and the amount of cash inflows are equal, of course, keeping a margin of extra cash for security reasons. Too much cash will reduce a bank's ability to make a profit, but it should not keep cash too low, below the minimum deemed necessary or prudent.

2. Short-term cash and cash equivalents, which are idle assets, should not be kept above the minimum necessary for security reasons. However, a bank may find that its cash reserves may be significantly strained due to seasonal variations in depositor and borrower demands. To cope with this pressure, it may need to maintain large cash reserves even during times when they are not needed at all. The second and better alternative to the bank is to have relatively liquid, but profitable assets that can be quickly and without losses converted into cash. There are two types of such assets, namely (a) emergency loans and short-term loans to stockbrokers, discount dealers and other banks, and (b) short-term government bills (short-term government loans). These assets can be quickly and without loss converted into cash when the bank wants it. Therefore, banks consider such assets as secondary reserves, as opposed to cash, which is their primary reserve. At the same time, these assets bring some income to the bank.

3. Short-Term Bills A commercial bank wants to purchase assets for a short period of time (usually 90 days) that are easily negotiable and therefore sufficiently liquid, while at the same time earning the bank some interest income. Such assets are sometimes called self-liquidating because there is evidence of actual commercial transactions that will result in the financing necessary to repay the original loan. These money bills consist mainly of bills of exchange. An exchange is a written promise made by the seller who ordered a certain good to pay a certain amount of money for a certain amount within a certain period of time. This account can be guaranteed by a banker, a well-known merchant house known in London as AcceptanceHouses. In addition to commercial paper, there are also short-term government bills through which the government borrows funds for short periods.

Commercial banks like short-term securities or bills of exchange for several reasons: First, these assets are easily tradable and can be easily bought and sold. In countries like England there is a special market for vouchers where these vouchers are bought and sold (at a discount). Therefore, if a commercial bank needs additional funds, it can easily discount the vouchers in the voucher market or discount market. Secondly, these bills are eligible for rediscounting at the country's central bank. This means that if a commercial bank wants cash, it can discount (or sell) short-term bills at the central bank. Thirdly, these accounts are very popular with commercial banks. Therefore, commercial banks prefer these short-term accounts due to their high marketability as well as interest income. They are considered ideal banking assets as they meet the dual requirements of liquidity and yield.

4. Credits and loans

The most profitable of all assets are loans and bank loans. This asset is widely sought after by banks. Bank credits and loans for entrepreneurs may be granted either in the current account credit system for a fixed amount or by discounting foreign currencies. Loans and advances carry high interest rates due to risk, low liquidity and difficulty in shifting. risk for the bank due to the possible insolvency of borrowers, and in extreme cases due to their insolvency and liquidation. Again, these loans and advances are characterized by low liquidity and low portability in the sense that they cannot easily be converted to cash, and when a bank needs extra cash to cover paychecks, there is also no way to transfer them to another bank or institution. In fact, every bank collapse can be attributed to the wrong credit and loan policy. From the point of view of the bank's safety and liquidity, loans and receivables are weak assets. But the high yield of these assets compensates for the difficulties associated with them. These assets therefore have low liquidity but high profitability.

5. Investments

Banks invest in securities that generate profits. Investments in government securities represent the book value of central and state government securities, including Treasury bills and government deposit receipts, etc. Banks may also invest in other approved securities. Individual types of investments are shown separately in the balance sheet. Banks treat their short-term investments as secondary reserves, unlike cash, which is their primary reserve.

6. Properties

Buildings, furniture and equipment, etc. are other assets of banks. These fixed assets are often referred to as dead inventory. They are usually carried at amortized value. They are, in a sense, the secret reserves of the banks that can be drawn upon in the event of a crisis or collapse.

The amount of assets a bank can control depends on the amount of its liabilities. Many types of assets, profitable and profitable, liquid and illiquid, are available for deposit. Therefore, the bank must formulate a portfolio policy specifying the types and proportions of assets it will acquire and hold.

Lesson 4

Commercial Banks: Creating Loans

Control of banks in the field of deposits

Bank deposits are of two types. There are working deposits that are used by entrepreneurs, industrialists and more to settle debts. These checking deposits are also known as cash deposits or demand deposits. The second type of bank deposits, which are not intended for current transactions, are savings deposits. They are prohibited as a form of saving or investment to obtain interest from banks. Savings deposits are not held to meet the needs of the present or immediate future, but are held by individuals as part of their total assets. Savings deposits can also be called term deposits. The type of savings deposits is defined as permanent deposits, i.e. cash deposits that can be withdrawn only after a certain period of time.

The distinction between current deposits and savings deposits is only gradual. Money is kept in the bank for convenience. It is used to cover overpayments in connection with the harvest. Current deposits will be useful for immediate repayment of liabilities, while savings deposits are used to pay off debts in the future. In the case of current deposits, the depositor expects only easy repayment of the debt. In the case of savings deposits, however, the depositor also expects interest income.

Who decides on the division of investments into current and savings deposits? It is the customer who decides whether he prefers current deposits or savings deposits. Additionally, if the depositor believes that he has a very large volume of current deposits from which he gets nothing, he can convert some of them into a savings deposit. Similarly, a customer with a savings deposit may exchange part of it for a current deposit. The bank has nothing to do with it.

Primary and derivative deposits

You can set up a deposit in two ways:

(a) People can deposit their money in the banking system. that is, they convert their cash into demand deposits. One form of money (cash in society) has changed into another form of money (bank money). The initiative to create deposits is taken by the customers themselves. Such deposits are called primary deposits. Apparently the total amount of money stays the same because in reality it is not.

(b) Primary deposits introduce cash into the banking system. With this cash, the banking system buys assets (bills, bonds, bank notes, etc.) on the market or lends them to businessmen and industrialists. Now, whenever a bank buys assets in the market or in certain places, it does not give them away but creates demand deposits on their behalf. These deposits are subordinated to the main deposit, which is why they are called derivative deposits. The initiative to create deposits comes from the banking system. In the modern monetary economy, the second of the deposits has become quite important. When we say that banks have control over deposits, it has become quite important. When we say that banks control deposits, we mean that they control the total volume of deposits. Let's see how the banking system is able to create deposits in derivatives by acquiring assets.

Credits Create deposits

Pay money and short term loans are extremely short-term loans made by a bank to speculators and brokers in the money and capital markets (i.e. the stock market). The bank credits the deposit accounts of these speculators and traders for their promises of immediate or short-term repayment. Speculators and traders would use these deposits to pay off their creditors. Creditors who receive checks or checks credit them to their accounts. Thus, as a result of the loan from the bank, deposits equal to the value of the loans were created.

Discounted bills are trade and financial bills, which are short-term securities (usually 90 days) that the bank obtains from the bill market. When a bank buys (or discounts) a bill of exchange from a party, it will either credit the latter's account (if the party has a bank account) or pay by check. The party selling the bills will deposit the check into their bank account. In both cases, bank deposits will increase.

Bank loans, commonly known as loans, are made by a bank to industrialists, businessmen, traders and others. After the loan is approved, the bank creates a deposit on behalf of the borrower. It allows the borrower to use this deposit to pay off creditors. And in this case, each loan granted by the bank creates a deposit. Banks, of course, create more deposits simply by making more and more advances.

Finally, the investment is made by the bank by buying and holding government bonds and other securities with maturities of more than three months. When a bank buys government bonds, it makes a bank deposit available to the government, which the government can use as it pleases. If a bank buys an old government bond on the stock market, it will create a deposit in favor of the seller, who will be free to use the money as they see fit.

From what we have described above, it should be clear that whenever a bank purchases an asset for a profit, it creates a deposit on behalf of the person or institution from whom the asset was purchased. The asset may promise payment in one or two days or accept payment in three months, or it may be a government I.O.E. be redeemed over a long period of time. Contrary to the promises of persons, institutions, and governments that are not money, the bank makes its own promise (i.e., a bank deposit) that is money, that is, it creates money. Two issues should be mentioned here. First, any assets acquired with a bank deposit of equivalent value. It is absolutely correct to say that bank loans create deposits. Banks take the initiative in granting credits and loans and acquire other profitable assets: they control the total volume of deposits in the banking system.

Second, commercial banks make money off other people's debts. Contrary to other people's promises to pay, banks make their own promises. The first is not money, but the second is money. In this sense, banks create money.

Restrictions on making deposits

An important question arises here. If a bank can buy assets simply by making its own promise to pay (i.e. bank deposits), is there an asset purchase restriction? Is there a deposit limit? We will answer this question in more detail in the next section. However, one point can be emphasized here. A commercial bank maintains cash reserves for its deposits. The ratio of cash to deposits may be prescribed by law or may be determined by convention and common practice. As the volume of profits on assets increases, the volume of bank deposits also increases, but the cash deposit ratio increases, the number of business transactions increases, which leads to an increase in the price level. As such, people will demand more currency notes for trading and transaction purposes. As society withdraws cash from the banks, the ratio of cash to bank deposits will shrink even further. Accordingly, the cash ratio declines in two rounds: (a) deposit growth and (b) cash outflow.

Given the absolute amount of cash reserves held by commercial banks in a country, the maximum amount of deposits that banks can create will depend on the ratio of cash reserves to deposits. Suppose commercial banks have cash reserves of Rs. 100 crores and in addition the ratio of statutory cash reserves to deposits is 10 percent. Commercial banks can then create and hold deposits worth Rs. 1000 crores. If the volume of bank deposits is smaller, banks can profitably acquire more assets as well as increase bank deposits. Of course, there will be people willing to borrow from commercial banks. Suppose your deposit size is Rs. 1,200 crores while the size of cash reserves is 100 crores rupees. With a legal reserve ratio of 10 percent, commercial banks should reduce their deposits by disposing of some of their profits. Therefore, there will be a simultaneous decrease in bank assets and bank deposits until the ratio of cash reserves to bank deposits reaches the level of 10%.

In this way, commercial banks have absolute control over the volume of bank deposits, provided or naturally: (a) cash supply, (b) public demand for cash, and (c) maintained cash ratio. The central bank enters the scene by controlling cash. By providing more cash, the central bank can expect the commercial bank to increase its profits and increase its bank deposits. By reducing cash, the central bank may try to achieve the opposite effect.

Credit creation technique

Demand deposits or cash deposits are money used as such, as any depositor with a current account at a commercial bank can meet his obligations with checks drawn on his account. The expansion or contraction of deposits thus means the expansion and contraction of money in the country. At present, as already mentioned, banks have the power to increase or decrease demand deposits, and they exercise this power by making more or less loans and advances. Today, the ability of commercial banks to increase deposits by expanding loans and advances is called credit creation.

Bank credit actually refers to bank loans and advances, and creation refers to the multiplication of credits and advances. Since every bank loan creates an equivalent deposit, creating credit by banks also means multiplying bank deposits. The word creation is used to imply that banks are unique institutions and can create assets (or make loans, buy bills and bonds) out of nothing. Or, with a small amount of cash, they are able to acquire a large amount of assets.

At one time, there was unnecessary controversy over the ability of commercial banks to create credit. Some authors meant the bank's loans and investments and therefore argued that a bank can never exceed the amount entrusted to it by depositors. Suppose a person deposited 500 rupees. 1000 that this bank could borrow up to Rs. 1000 and no more. In fact, he would have to borrow less because he would have to maintain a small margin of cash reserves in case money is withdrawn from depositors. In any case, the bank could not borrow more than Rs. 1000 and therefore it was concluded that the bank cannot create a loan.

It is true that the bank cannot borrow more than it has. But it is equally true that what is borrowed from the bank returns to the bank in the form of new deposits, which can be borrowed again, and so on. becomes the basis of a loan or investment, which is returned to the bank as a new deposit, becomes the basis of a loan or investment, which is returned to the bank as a new deposit, becomes the basis of a new loan, and so on. Commercial banks are therefore able to multiply loans and investments, and thus multiply deposits. A small volume of cash is the basis for multiplying deposits by multiplying credits and loans (credit creates deposits). In this sense, banks create loans. Credit creation can be defined as the expansion of bank deposits through the process of increasing the number of credits and loans and investments.

Credit creation technique

Let us explain in an extremely simplified way the technique or process of building credit assuming:

a) the existence of a number of banks A, B, C, D, etc., each with a different group of depositors;

(b) Each bank must maintain 20 percent cash reserves as required by law. AND

(c) A new deposit of Rs. To start, I made 1000 in bank A

After a new deposit of Rs. A transfer of 1000 was made to Bank A, the balance sheet of the bank (considering only the new transaction) is as follows: Balance of Bank A

Amount of liabilities (in thousands) Amount of assets (in thousands)

New deposit 1000 New cash 1000

Total 1,0001,000

Under the double entry scheme, the amount of Rs. 1000 is shown on both sides. Deposit of Rs. 1000 is the responsibility of the bank, as it is obliged to return this amount to the depositor at his request. At the same time, this amount is an asset for the bank that can be used to earn interest income. Bank A only needs to hold a 20% reserve i.e. Rs. 200 for her new deposit. has a surplus of 500,000. 800 that he can use profitably. Suppose Bank A makes a loan to Mr. X, who uses the amount to pay off creditors. After the loan was taken out and Mr. X withdrew the amount to be paid to creditors, the Bank's balance sheet. And it will look like this:

Bank A balance sheet

Amount of liabilities (in thousands) Amount of assets (in thousands)

Deposit 1000 Cash 200

A loan to Mr. X800

Total 1,0001,000

Now the creditors of Mr. X who received Rs. 800 from the latter, they can be considered to have deposited this amount with their bank, i.e. Bank B. (This assumption is not necessary as Mr. X's creditors can transact with Bank A by depositing 800 rupees with the same Bank A). Bank B's balance sheet will look like this:

Bank B balance sheet

Amount of liabilities (in thousands) Amount of assets (in thousands)

New deposit 800 New cash 800

Total 800,800

After maintaining a cash reserve of 500,000 160 (i.e. 20 percent of Rs 800), Bank B can borrow the balance of Rs. 640 each. Suppose a bank buys bills worth 100,000. 640.

The Bank's Balance Sheet will be: Bank B's Balance Sheet

Amount of liabilities (in thousands) Amount of assets (in thousands)

Deposit 800 New cash 160

Bills 640

Total 8,001,000

We can assume that billing sellers who received Rs. 640 from Bank B will deposit the amount with his bank, i.e. BankC. Bank C's balance sheet will be as follows: Bank balance sheet Liabilities amount (Rs.) Asset amount (Rs.)

Deposit 640 New Cash 640

Total 640,640

Bank C states that it has excess cash reserves of or Rs. 512 (with a cash reserve of less than 20%, a cash reserve of Rs 128 should be maintained against a deposit of Rs 640 only). Suppose Bank C invests rupees. 512. Its balance sheet will be as follows Bank balance sheet Liabilities amount (Rs.) Asset amount (Rs.)

Deposit 640 New Cash 128


Total 640,640

Now Mr Y who sold long term securities to Bank C for Rs 512. he would be expected to deposit this amount with his bank, i.e. BankD, which in turn could keep 20 percent as a cash reserve and make loans there. The process of converting the deposit into a loan or divestment, which in turn becomes a new deposit, continues until the original deposit of Rs. 1000 pieces have been completely sold out. Initial deposit of Rs. 1000 additional deposits of 800, 640, 512, 410, 328 etc. have been made. If we add all these deposits, the total will be Rs. 4999.99 or Rs. 5000. This is the process of multiplying deposits through the process of creating credit.

Credit creation formula

Since credit creation depends on the ratio of cash reserves to deposits, the deposit multiplier is

If the cash reserve ratio is 10 percent or 0.1, the deposit multiplier is 10, and so on. The higher the cash reserve ratio, the lower the deposit multiplier will be. The total deposit generated will be the extra cash (M) multiplied by the deposit multiplier. This is

Additional Aggregate Deposit (D) = M X K

If commercial banks receive new cash of Rs. 10 crores, as a result of government spending, could multiply deposits through loans and investments of Rs. 50 crores (assuming a cash reserve of 20 percent of rupees). This is

D = M X K = Rs. 10 crore x 5 = rupii. 50 crorów

So far, we have assumed that credit creation will take place in the case of a large number of banks. However, having multiple banks is not really necessary, one bank is enough. Even then, the credit building process will be the same. This means that whenever a bank has excess cash reserves, it will either lend or invest them. this amount will be returned to the bank in the form of a new deposit, which will become the basis for another loan, and so on. Money that comes out of the bank in the form of loans, etc., and money that goes into a depository that collects the cash that was in the bank before the total. Thus, credit creation will take place whether we consider just one bank in an isolated city, or whether we consider the banking system as a whole.

credit agreements

Just as there is a multiple expansion of deposits, there is a multiple contraction of bank deposits as money is removed from the banking system. Suppose there are many banks in the banking system. Each bank must also maintain a 20% cash reserve to deposit ratio. Let us further assume for simplicity that each bank holds a cash reserve of Rs. 10,000, total deposits Rs. 50,000 and loans and investments worth Rs. 40,000. Suppose a depositor withdraws Rs. 1000 from Bank A. Bank A's balance sheet will look like this: Bank A

Amount of liabilities (in thousands) Amount of assets (in thousands)

Deposit 49,000 Cash 9,000

Loans and investments 40,000

Total 49,00049,000

Against deposit liabilities of Rs. 49,000 Bank A requires 9,800 rupees. as a cash reserve (this is 20 percent of deposits). But the Bank only has Rs. 9,000, leaving a deficit of Rs. 800. The bank will cover the shortfall by transferring Rs. An investment of €800 in a person who can be acquired in banking transactions with Bank B and therefore issues a check against Bank B's payment. After Bank A withdraws the amount from Bank B, Banks A and B's balance sheet will as follows:

Amount of liabilities of the bank (in thousands) Amount of assets (in thousands)

Deposit 49,000 Cash 9,800

Loans and investments39,200

Total 49,00049,000

Amount of liabilities of the bank (in thousands) Amount of assets (in thousands)

Deposit 49,200 Cash 9,200

Loans and investments 40,000

Total 49 20049 200

Bank A's balance sheet shows that by getting rid of some investments, it was able to return to a satisfactory situation. However, Bank B's balance sheet shows a decrease of Rs. 800 from her deposits and the same from cash. This account was paid to Bank A in exchange for the sale of Rs. 800. Bank B is currently short of Rs. 640. (He demands 9,840 rupees for total deposits of 49,200 rupees, but actually only has 9,200 rupees.) To cover the shortfall, Bank B will sell part of the investment to people who can bank with Bank C and who write a check for Bank Cin fee. After Bank B receives the payment from Bank C, the balance sheets of both banks will be as follows:

Bank B

Amount of liabilities (in thousands) Amount of assets (in thousands)

Deposit 49,200 Cash 9840

Loans and investments39,360

Total 49 20049 200

Bank C

Amount of liabilities (in thousands) Amount of assets (in thousands)

Deposit 49,360 Cash 9,360

Loans and investments 40,000

Total 49 36049 360

Bank B has complied, but Bank C has a cash shortfall which it will cover by depositing its investments or borrowing. This process continues until all effects are exhausted. So the initial deposit reduction of Rs. 1000 from Bank A followed by a drop in deposits of Rs. 800 from Bank B in the amount of Rs. 640 from Bank C and so on. The process of shrinking bank deposits is the same as expanding - only towards reserves.

Restrictions on borrowing

Theoretically, the banking system can create unlimited amounts of money through the expansion of deposits. However, there are creation factors on which the size of credit creation depends. Attempting to extend credit beyond the creative limit is impossible, but it is dangerous.

(i) Amount of cash held: The first important factor that determines the extent of credit creation is the amount of cash held by commercial banks. We have shown that banks must exchange demand deposits in coins and notes at the request of their depositors. Otherwise, it will mean the immediate bankruptcy of the bank. The greater the amount of cash in the banking system, the greater will be credit creation. As Crowther says, Thebanks profit from the leverage with which the entire gigantic system was manipulated.

(ii) Cash reserve ratio: The required cash to deposit ratio is another important factor that will determine the amount of credit creation. We have shown that the credit creation will be the reserve of the cash reserve rate. If a bank deems or is required by law to hold cash equivalent to 10 percent of deposits in cash, the bank may increase the amount of its deposits to 10 times its cash holdings if the bank is required to hold 20 percent of cash Provisioning for deposits will only be five times . Thus, the higher the percentage of cash reserves to be maintained, the lower the volume of credit creation will be.

(iii) Public willingness to hold cash: Credit creation depends on the amount of cash in the banking system, which in turn will depend on the public's willingness to hold cash. If for some reason they decide to hold more cash (assuming the total number of notes and coins is constant), banks will be left with less cash and thus less credit creation. In fact, a large expansion of deposits will increase the country's total money supply, and this will be accompanied by increased business volume, higher prices, wages, holding transactions, etc. Depositors would like to store more cash in the form of coins and notes. This will mean a decrease in the volume of deposits in banks.

(iv) Nature of business conditions in the country: The credit will depend on the nature of the business conditions. The credit will be large in times of economic hardship and smaller during recessions. In times of good economic conditions, the demand for loans and credits for investment purposes will be greater. And as we have seen, the expansion of deposits depends on the volume of bank loans and borrowings. Therefore, in times of good economic times, many people turn to banks for loans and advances, and therefore the volume of bank loans will be high. In addition, banks are willing to grant free credit during such periods due to the general optimism and high rate of return.

However, during periods of economic crisis, the amount of loans and advances will be small, and small entrepreneurs and industrialists may not apply for loans during this period. In addition, banks may prefer to hold excess reserves and sacrifice profits. There can be many reasons for this.

(a) Banks can anticipate a possible loss of depositors' confidence in them and, consequently, a possible loss of their confidence.

(b) They may be unsure of borrowers' ability to repay. During a recession, credit shrinks, partly because borrowers lack solid investments, and partly because the right values ​​don't exist.

(c) They may be concerned about a decline in stock prices. Therefore, they may not want to invest in them. So they may choose to keep more cash reserves with them and not lend to the maximum extent, but in normal times we can expect them to borrow and invest to the maximum extent their cash reserves allow.

(v) Credit Creation Leaks: There may be a difference between the maximum possible credit expansion and the actual expansion due to certain leaks in the credit creation. In our simple credit creation example above, these leaks were actually omitted. The main leaks are:

(a) Banks may not be able to make loans and investments based precisely on the excess funds they may have. For example, if the bank has a surplus of 800 rupees, it is not necessary to provide the exact amount of rupees. 800 can be borrowed. To the extent that the actual loan is less than Rs. 800, credit generation will be lower.

(b) Amounts of advances made by banks are deemed to have been returned to them in the form of new deposits. But that might not be the case because the audience might want to keep some cash with them. Again, therefore, new deposits may not include the full amount of loans made previously. Credit creation will therefore be limited again.

(iv) Monetary policy of the central bank. The scale of credit creation will largely depend on the monetary policy of the country's central bank. On the one hand, the central bank has an impact on the amount of money in the country, on the other hand, it can directly or indirectly affect the ability of banks to extend credit agreements.

The importance of building and reducing credit

Bank deposits are the dominant form of money in modern societies, and therefore the expansion of bank deposits means an increase in the money supply and contraction means a decrease in the money supply. However, fluctuations in the money supply have a direct impact on the level of economic activity, prices and wages. An increase in the volume of credit, leading to an increase in the money supply, will lead to an increase in prices and profit margins and, consequently, to an increase in economic and economic activity. On the other hand, a reduction in bank credit will lead to a reduction in economic activity. At one time, credit expansion and contraction figured prominently in explaining business cycles, as well as in any policy designed to control them. However, they are now considered to be of secondary importance. This means that, at most, it may not be responsible for prosperity or depression, but when prosperity or depression sets in, the reduction in credit expansion accelerates the rate of cyclical fluctuations. Maximizing the expansion of bank credit can trigger a boom, while failing to create as much credit as reserves will allow will stifle a recession.

Regardless of whether credit expansion (and contraction) plays a major or only secondary role in causing cyclical fluctuations, it is clear that any business stability policy should include measures to achieve stability of credit expansion and contraction.

Lesson 5

Organization and structure of banks

Banking organizations

1. People

The law does not prohibit a person from performing banking activities. Its main difficulty now would be to attract depositors when there are large, reputable banking firms and private and public sector companies. The maximum number of depositors has also been limited by the Reserve Bank of India Act.

Prohibition of deposits by unlisted organizations Chapter IIIC was added to the Reserve Bank of India Act 1934 by the Banking (Amendment) Act 1983, effective February 15, 1984, containing Sections 45R, 45S and 45T . Article 45 provides that no person, natural person, company or association of natural persons without legal personality may hold deposits from more than the following number of depositors:

(i) Individuals No more than 25 depositors, excluding relatives.

(ii) Business No more than 25 depositors per partner and no more than 250 in total, excluding relatives of any partner.

(iii) Association of unincorporated persons Not more than 25 depositors per person and not more than 250 in total, excluding relatives of any person.

sec. 2 provides that if, at the time of entry into force of the Act, the number of depositors exceeds the above limit, that person is obliged to repay such a number of depositors within 2 years to bring them down to the specified limits.

(a) a person is considered to be related to another person if and if: - (i) he/she is a member of an undivided Hindu family, or (ii) he/she is the spouse of (iii) one related to the other in the manner specified in the list of relatives:

(b) a person to whom a credit balance remains outstanding for a period not exceeding 6 months in any account relating to reciprocal transactions in the ordinary course of business or business shall not, solely because of such balance, be regarded as a custodian.

In the case of Kanta Mehta V. Union of India and others (1987), the Delhi High Court held that Section 45-S (read in conjunction with Section 48B(5A) of Chapter III-C of the Reserve Bank of India Act 1934, as amended added under section 10 of the Banking Law (Amendment) Act 1983, which imposes a deposit cap on natural persons, Firmand is non-discriminatory and does not affect the fundamental right to conduct a business or to form associations or associations. violates Articles 14 and 19 of the Constitution, there is nothing manifestly immaterial or perverse to limit the number of depositors an individual, form or association may accept nor is there any element of compulsion against individuals, companies or associations that do so are not registered for the purpose of incorporating a company. III-C imposes reasonable restrictions on the right of individual unincorporated companies and associations to engage in the business of taking deposits and lending or lending to the public. There is further assurance that Chapter III-C operates under the supervision and control of the Reserve Bank of India. Section 45 further provides that an officer of the Reserve Bank or State Government authorized on that behalf may obtain a search warrant from the court allowing him to enter and search any premises suspected of being used for the purpose of receiving deposits in violation of section 45. 45S. This warrant will be executed in the same manner and will have the same effect as a search warrant issued under the Code of Criminal Procedure 1973.

II. Partnerships A company with more than ten partners cannot carry on banking business: it must be registered as a company (Section 11(1) of the Companies Act 1956). A banking company with ten or fewer partners faces the same difficulties as an individual. Partnership law is laid down in the Indian Partnerships Act, 1932.

III. Hindu joint family system

In many places in India, except in cities, banking was conducted by private banks owned by joint Hindu families. Among the most famous are the VAishya, Jain and Marathif families scattered throughout India and the Nattukottai Chetty family in Madras state. Khatries and Aurora in Punjab and Multanies in Gujarat and Uttar Pradesh. This system is strikingly similar to our modern equity banks in many respects. His lie is institutional, not personal, and therefore enjoys uninterrupted continuity, has a separate legal existence, and the coming or going of persons has not the slightest effect on the continuity of this body. The concept of a joint Hindu family is recognized by law. Pursuant to this Act, an enterprise is a separate inherited asset. When an Indian dies leaving the company, it passes to his heirs like other hereditary goods. If he dies leaving a male heir, the matter will fall to them. In the hands of male affairs, it becomes a Joint Family Business, and a business consisting of a man who is issued becomes a Joint Family Business (Mullas Hindu Law). A professional partnership is not an ordinary company established by contract, but a family company established by law. The rights and obligations of partners forming a family business, as well as persons cooperating with the company, should not be determined solely on the basis of the Indian Partnerships Act, but should be considered in relation to certain principles of Indian law.

IV Business and Enterprise Banking

Most of the banking business in India is now carried out by scheduled banks which are banking companies and nationalized banks. Most banking activity in the country belongs to the public sector. There are 27 public sector banks in total, including the State Bank of India and its 7 sister banks, 19 commercial banks which were nationalized in July 1969 and April 1980. Public sector banks account for about 90% of total banking in India.

The rules governing the establishment, management and administration of private sector banking companies are laid down in the Banking Regulation Act (formerly known as the Banking Companies Act 1949).

The management board of a private sector banking company shall be appointed pursuant to Art. 10A of the Banking Law.

The managing director of such a banking company shall be the private sector, to be established in accordance with Art. 10A of the Banking Regulation Act.

19 public sector banks have their own directors appointed by the central government under the provisions of the Banking Companies (Business Takeovers and Transfers) Acts 1970 and 1980.

Stand-alone versus branch banking The structure of banking varies from country to country, depending on social, economic and political conditions. Broadly speaking, there are two types of banking systems – branch banking and unit banking. Controversy grew between economists and bankers over the relative superiority of the two banking systems. Even now, the effects of the controversy have not entirely gone away. These controversies, however, have no practical significance.

Bank branch

The branch banking system is a system in which each commercial bank has a network of branches operating throughout the country. Each bank is a separate legal entity and consists of a management board and a group of shareholders.

Merits of Branch Banking

Branch banking has some distinct advantages over stand-alone banking. Here are some of them.

1. Large scale advantage - interventions

First, the branch banking system has the advantages of large-scale operations. R.S. Sayers also shares this view. Efficiency of administration, economy in operation, effective control over the central bank, etc. are just some of the important advantages of having branch banking. Banking functions can be divided into several departments and assigned to different people or groups of people. The Bank's employees can be trained in management and supervision in training centers established for this purpose. Expert advice from the head office is always available in all branches.

2. Savings economy

Every bank should hold a certain amount of its cash deposits in order to gain and maintain a high level of public trust. But profitability is the opposite disadvantage


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