A

Project File
On
Kinds of banks and their functions

Submitted in partial fulfilment of B.Com LLB

Semester- VI
Session- 2018-19

SUBJECT- Banking Law

SCHOOL OF LAW

GURU GHASIDAS

VISHWAVIDYALAYA

Submitted to : Submitted by :

Mr. Abhishek Mishra Tripti Rajput

(Assistant Professor) B.Com LLB (6th sem)
 DECLARATION

I, TRIPTI RAJPUT, ROLL. NO. 56, B.Com.LL.B 6THSemester, OF

GURU GHASI DAS UNIVERSITY does hereby declare that, this project is my
original work and I have not copied this project or any part there from any
sources without any acknowledgement. I am highly indebted to the author of the
book that I have preferred in my book as well as all the writers of the articles
and the owner of the information taken from website to it. It is only because of
their contribution and proper guidance of my faculty adviser Mr. Abhishek
Mishra Sir, that I was able to gather light on the subject.

TRIPTI RAJPUT
ROLL.NO.-56
B.Com.LL.B (6TH SEMESTER).
 CERTIFICATE

I am too glad to submit this project report on “Kinds of banks and their
functions” as a part of my academic assignment. This project is based on
research methodology. It further studies making sources and method of research
methodology and further discusses the interview method. I hope this would be
significant for academic purpose as well as prove information to all readers.
Here through I declare that this paper is an original piece of research and
all the borrowed text and ideas have been duly acknowledged.

SUBMITTED BY SIGNATURE OF FACULTY

TRIPTI RAJPUT
 ACKNOWLEDGEMENT

I would like to express my earnest and deepest gratitude to Mr. Abhishek

Mishra, faculty of banking law, for giving me opportunity to do a project on
such a important topic of ‘Kinds of banks and their functions’. I am grateful
for the assistance, guidance and support that were extended during the course of
excellent research. I thank my parents and my friends for their moral support
and love throughout my research work and projects operation. Above all I thank
the God almighty for the blessing me with the health vitality to complete this
projects.

TRIPTI RAJPUT
 SYNOPSIS

Topic:- Kinds of banks and their functions

1. Introduction
2. Bank : Meaning and Definition
3. Functions of Bank
4. Kinds of Banks
5. Function of different kinds of Bank
6. Conclusion
7. Bibliography
 Introduction

In simple words, Banking can be defined as the business activity of accepting

and safeguarding money owned by other individuals and entities, and then
lending out this money in order to earn a profit.    However, with the passage of
time, the activities covered by banking business have widened and now various
other services are also offered by banks.  The banking services these days
include issuance of debit and credit cards, providing safe custody of valuable
items, lockers, ATM services and online transfer of funds across the country /
world.

Banking is an industry that handles cash, credit, and other financial transactions.
Banks provide a safe place to store extra cash and credit. They offer savings
accounts, certificates of deposit, and checking accounts. Banks use
these deposits to make loans. These loans include home mortgages, business
loans, and car loans.

Banks are a safe place to deposit excess cash. The Federal Deposit Insurance
Corporation (FDIC) insures them. Banks also pay savers interest rates or a small
percent of the deposit.

Banks can turn every one of those saved dollars into $10. They are
only required to keep 10 percent of each deposit on hand. That regulation is
called the reserve requirement. Banks lend the other 90 percent out. They make
money by charging higher interest rates on their loans than they pay for
deposits.
 Meaning of Bank
The term bank has originated from the term ‘Banchi’. In olden days, the traders
of Italy who performed the job of exchanging money were known as Banchi or
Bancheri because the table which they used for making payment was called a
Banchi.

According to some people, the term bank is derived from the Greek word
‘Banque.’

A bank deals in money in the same way as a businessman deals in goods. Banks
are business enterprises which deal in money, financial instruments and provide
financial services for a price called interest, discount, commission etc.

Definitions of bank

“Banking is the business of accepting for the purpose of lending or investment,

of deposits of money from the public repayable on demand or otherwise and
withdraw-able by cheque, draft, and order or otherwise.” Indian Banking
Regulation Act, 1949

“A bank is an organisation whose principal operations are concerned with the

accumulation of the temporarily idle money of the general public for the
purpose of advancing to others for expenditure.”-R.P. Kent

A bank is a financial institution licensed to receive deposits and make loans.

Banks may also provide financial services, such as wealth management,
currency exchange, and safe deposit boxes. There are two types of banks:
commercial/retail banks and investment banks. In most countries, banks are
regulated by the national government or central bank.
 Functions of Bank
A. Primary Functions of Banks
The primary functions of a bank are also known as banking functions. They are
the main functions of a bank.
These primary functions of banks are explained below.

1. Accepting Deposits
The bank collects deposits from the public. These deposits can be of different
types, such as :

a. Saving Deposits
This type of deposits encourages saving habit among the public. The rate of
interest is low. At present it is about 4% p.a. Withdrawals of deposits are
allowed subject to certain restrictions. This account is suitable to salary and
wage earners. This account can be opened in single name or in joint names.

b. Fixed Deposits
Lump sum amount is deposited at one time for a specific period. Higher rate of
interest is paid, which varies with the period of deposit. Withdrawals are not
allowed before the expiry of the period. Those who have surplus funds go for
fixed deposit.

c. Current Deposits
This type of account is operated by businessmen. Withdrawals are freely
allowed. No interest is paid. In fact, there are service charges. The account
holders can get the benefit of overdraft facility.

d. Recurring Deposits
This type of account is operated by salaried persons and petty traders. A certain
sum of money is periodically deposited into the bank. Withdrawals are
permitted only after the expiry of certain period. A higher rate of interest is
paid.

2. Granting of Loans and Advances

The bank advances loans to the business community and other members of the
public. The rate charged is higher than what it pays on deposits. The difference
in the interest rates (lending rate and the deposit rate) is its profit.
The types of bank loans and advances are :-
a. Overdraft
This type of advances are given to current account holders. No separate account
is maintained. All entries are made in the current account. A certain amount is
sanctioned as overdraft which can be withdrawn within a certain period of time
say three months or so. Interest is charged on actual amount withdrawn. An
overdraft facility is granted against a collateral security. It is sanctioned to
businessman and firms.

b. Cash Credits
The client is allowed cash credit upto a specific limit fixed in advance. It can be
given to current account holders as well as to others who do not have an account
with bank. Separate cash credit account is maintained. Interest is charged on the
amount withdrawn in excess of limit. The cash credit is given against the
security of tangible assets and / or guarantees. The advance is given for a longer
period and a larger amount of loan is sanctioned than that of overdraft.

c. Loans
It is normally for short term say a period of one year or medium term say a
period of five years. Now-a-days, banks do lend money for long term.
Repayment of money can be in the form of installments spread over a period of
time or in a lumpsum amount. Interest is charged on the actual amount
sanctioned, whether withdrawn or not. The rate of interest may be slightly lower
than what is charged on overdrafts and cash credits. Loans are normally secured
against tangible assets of the company.

d. Discounting of Bill of Exchange

The bank can advance money by discounting or by purchasing bills of exchange
both domestic and foreign bills. The bank pays the bill amount to the drawer or
the beneficiary of the bill by deducting usual discount charges. On maturity, the
bill is presented to the drawee or acceptor of the bill and the amount is
collected.

B. Secondary Functions of Banks ↓

The bank performs a number of secondary functions, also called as non-banking
functions.
These important secondary functions of banks are explained below.

1. Agency Functions

The bank acts as an agent of its customers. The bank performs a number of
agency functions which includes :-
a. Transfer of Funds
The bank transfer funds from one branch to another or from one place to
another.

b. Collection of Cheques
The bank collects the money of the cheques through clearing section of its
customers. The bank also collects money of the bills of exchange.

c. Periodic Payments
On standing instructions of the client, the bank makes periodic payments in
respect of electricity bills, rent, etc.

d. Portfolio Management
The banks also undertakes to purchase and sell the shares and debentures on
behalf of the clients and accordingly debits or credits the account. This facility
is called portfolio management.

e. Periodic Collections
The bank collects salary, pension, dividend and such other periodic collections
on behalf of the client.

f. Other Agency Functions

They act as trustees, executors, advisers and administrators on behalf of its
clients. They act as representatives of clients to deal with other banks and
institutions.

2. General Utility Functions

The bank also performs general utility functions, such as :-

a. Issue of Drafts and Letter of Credits

Banks issue drafts for transferring money from one place to another. It also
issues letter of credit, especially in case of, import trade. It also issues travellers'
cheques.

b. Locker Facility
The bank provides a locker facility for the safe custody of valuable documents,
gold ornaments and other valuables.

c. Underwriting of Shares
The bank underwrites shares and debentures through its merchant banking
division.
d. Dealing in Foreign Exchange
The commercial banks are allowed by RBI to deal in foreign exchange.

e. Project Reports
The bank may also undertake to prepare project reports on behalf of its clients.

f. Social Welfare Programmes

It undertakes social welfare programmes, such as adult literacy programmes,
public welfare campaigns, etc.

g. Other Utility Functions

It acts as a referee to financial standing of customers. It collects
creditworthiness information about clients of its customers. It provides market
information to its customers, etc. It provides travellers' cheque facility.

Kinds of Bank
There are various kinds of banks which operate in our country to meet the
financial requirements of different categories of people engaged in agriculture,
business, profession, etc. On the basis of functions, the banking institutions in
India may be divided into the following types:

1) Central Bank (RBI, in India)

2) Commercial Banks
(i) Public Sector Banks
(ii) Private Sector Banks
(iii) Foreign Banks

3) Co-operative Banks
(i) Primary Credit Societies
(ii) Central Co-operative Banks
(iii) State Co-operative Banks

4) Development Banks
5) Specialised Banks (EXIM Bank SIDBI, NABARD)

Function of different kinds of Bank

a) Central Bank
A bank which is entrusted with the functions of guiding and regulating the
banking system of a country is known as its Central bank. Such a bank does not
deal with the general public. It acts essentially as Government’s banker,
maintain deposit accounts of all other banks and advances money to other
banks, when needed. The Central Bank provides guidance to other banks
whenever they face any problem. It is therefore known as the banker’s bank.
The Reserve Bank of India is the central bank of our country. The Central Bank
maintains record of Government revenue and expenditure under various heads.
It also advises the Government on monetary and credit policies and decides on
the interest rates for bank deposits and bank loans. In addition, foreign exchange
rates are also determined by the central bank. Another important function of the
Central Bank is the issuance of currency notes, regulating their circulation in the
country by different methods. No other bank than the Central Bank can issue
currency.

 Functions:-
1. Regulator of Currency:
The central bank is the bank of issue. It has the monopoly of note issue. Notes
issued by it circulate as legal tender money. It has its issue department which
issues notes and coins to commercial banks. Coins are manufactured in the
government mint but they are put into circulation through the central bank.

Central banks have been following different methods of note issue in different
countries. The central bank is required by law to keep a certain amount of gold
and foreign securities against the issue of notes. In some countries, the amount
of gold and foreign securities bears a fixed proportion, between 25 to 40 per
cent of the total notes issued.

2. Banker, Fiscal Agent and Adviser to the Government:

Central banks everywhere act as bankers, fiscal agents and advisers to their
respective governments. As banker to the government, the central bank keeps
the deposits of the central and state governments and makes payments on behalf
of governments. But it does not pay interest on governments deposits. It buys
and sells foreign currencies on behalf of the government.
It keeps the stock of gold of the government. Thus it is the custodian of
government money and wealth. As a fiscal agent, the central bank makes short-
term loans to the government for a period not exceeding 90 days. It floats loans,
pays interest on them, and finally repays them on behalf of the government.
Thus it manages the entire public debt. The central bank also advises the
government on such economic and money matters as controlling inflation or
deflation, devaluation or revaluation of the currency, deficit financing, balance
of payments, etc. 

3. Custodian of Cash Reserves of Commercial Banks:

Commercial banks are required by law to keep reserves equal to a certain
percentage of both time and demand deposits liabilities with the central banks.
It is on the basis of these reserves that the central bank transfers funds from one
bank to another to facilitate the clearing of cheques.

Thus the central bank acts as the custodian of the cash reserves of commercial
banks and helps in facilitating their transactions. 

4. Controller of Credit:
The most important function of the central bank is to control the credit creation
power of commercial bank in order to control inflationary and deflationary
pressures within this economy. For this purpose, it adopts quantitative methods
and qualitative methods. Quantitative methods aim at controlling the cost and
quantity of credit by adopting bank rate policy, open market operations, and by
variations in reserve ratios of commercial banks.

5. Custody and Management of Foreign Exchange Reserves:

The central bank keeps and manages the foreign exchange reserves of the
country. It is an official reservoir of gold and foreign currencies. It sells gold at
fixed prices to the monetary authorities of other countries. It also buys and sells
foreign currencies at international prices. Further, it fixes the exchange rates of
the domestic currency in terms of foreign currencies.

b) Commercial Banks

Commercial Banks are banking institutions that accept deposits and grant short-
term loans and advances to their customers. In addition to giving short-term
loans, commercial banks also give medium-term and long-term loan to business
enterprises. Now-a-days some of the commercial banks are also providing
housing loan on a long-term basis to individuals. There are also many other
functions of commercial banks, which are discussed later in this lesson.

Types of Commercial banks:

Commercial banks are of three types i.e., Public sector banks, Private sector
banks and Foreign banks.

(i) Public Sector Banks: These are banks where majority stake is held by the
Government of India or Reserve Bank of India. Examples of public sector banks
are: State Bank of India, Corporation Bank, Bank of Boroda and Dena Bank,
etc.
(ii) Private Sectors Banks: In case of private sector banks majority of share
capital of the bank is held by private individuals. These banks are registered as
companies with limited liability. For example: The Jammu and Kashmir Bank
Ltd., Bank of Rajasthan Ltd., Development Credit Bank Ltd, Lord Krishna
Bank Ltd., Bharat Overseas Bank Ltd., Global Trust Bank, Vysya Bank, etc.
(iii) Foreign Banks: These banks are registered and have their headquarters in a
foreign country but operate their branches in our country. Some of the foreign
banks operating in our country are Hong Kong and Shanghai Banking
Corporation (HSBC), Citibank, American Express Bank, Standard & Chartered
Bank, Grindlay’s Bank, etc. The number of foreign banks operating in our
country has increased since the financial sector reforms of 1991.

 Functions:-
1. Accepting deposits:
The most significant and traditional function of commercial bank is accepting
deposits from the public. The deposits may be of three types: Saving deposits,
Current deposits and fixed deposits. In case of current account, people can
withdraw deposits in part or in full at any time he likes without notice.

2. Providing loans:
The second important function of the commercial bank is to provide loans
against suitable mortgages to the public to fulfill their needs of money. Loans
can be granted in the form of cash credit, demand loans, short- term loan,
overdraft, discounting of bills etc. Under cash credit system, borrower is
sanctioned a credit limit up to which he can borrow from the bank. The interest
payable by the borrower is calculated on the amount of credit limit actually
drawn. Demand loans granted by a bank are those loans which can be recalled
on demand by the bank any time.

3. Credit Creation:
This is an unique function performed by the commercial banks. A bank has
sometimes been called a factory for the manufacture of credit. In the process of
acceptance of deposits and granting of loans, commercial banks are able to
create credit.
4. Transfer of funds:
Commercial banks are able to transfer funds of a customer to other customer’s
account through the cheques, draft, mail transfers, telegraphic transfers etc.

c) Development Banks

Business often requires medium and long-term capital for purchase of

machinery and equipment, for using latest technology, or for expansion and
modernization. Such financial assistance is provided by Development Banks.
They also undertake other development measures like subscribing to the shares
and debentures issued by companies, in case of under subscription of the issue
by the public. Industrial Finance Corporation of India (IFCI) and State Financial
Corporations (SFCs) are examples of development banks in India.

 Functions:-
1. To Promote and Develop Small-Scale Industries (SSI).
2. To Finance the Development of Housing Sector.
3. To Develop the Large-Scale Industries (LSI).
4. To help in Agricultural and Rural Development.
5. To enhance the Foreign Trade of India.
6. To help to Review (Cure) Sick Industrial Units.
7. To encourage the development of Indian entrepreneurs.
8. To promote economic activities in backward regions of the country.
9. To contribute in the growth of capital markets.

d) Co-operative Banks

People who come together to jointly serve their common interest often form a
co-operative society under the Co-operative Societies Act. When a co-operative
society engages itself in banking business it is called a Co-operative Bank. The
society has to obtain a licence from the Reserve Bank of India before starting
banking business. Any co-operative bank as a society is to function under the
overall supervision of the Registrar, Co-operative Societies of the State. As
regards banking business, the society must follow the guidelines set and issued
by the Reserve Bank of India

Types of Co-operative bank

There are three types of co-operative banks operating in our country. They are
primary credit societies, central co-operative banks and state co-operative
banks. These banks are organized at three levels, village or town level, district
level and state level.

(i) Primary Credit Societies: These are formed at the village or town level with
borrower and non-borrower members residing in one locality. The operations of
each society are restricted to a small area so that the members know each other
and are able to watch over the activities of all members to prevent frauds.

(ii) Central Co-operative Banks: These banks operate at the district level
having some of the primary credit societies belonging to the same district as
their members. These banks provide loans to their members (i.e., primary credit
societies) and function as a link between the primary credit societies and state
co-operative banks.

(iii) State Co-operative Banks: These are the apex (highest level) co-operative
banks in all the states of the country. They mobilise funds and help in its proper
channelisation among various sectors. The money reaches the individual
borrowers from the state co-operative banks through the central co-operative
banks and the primary credit societies.

 Functions:-

1. They function with the rule of “one member, one vote” and function on “no
profit, no loss” basis
2. It performs all the main banking functions of deposit mobilization, the
supply of credit and provision of remittance facilities
3. It provides financial assistance to the people with small means to protect
them from the debt trap of the moneylenders
4. It is engaged in tasks of production, processing, marketing, distribution,
servicing and banking in India
5. It supervises and guides affiliated societies
6. Mobilization of funds from their members
7. Advance loans to the members
8. Rural financing for farming, cattle, milk, hatchery, personal finance, etc.
9. Urban financing for Self – employment, Industries Small scale units, Home
finance, Consumer finance, Personal finance

e) Specialised Banks

There are some banks, which cater to the requirements and provide overall
support for setting up business in specific areas of activity. EXIM Bank, SIDBI
and NABARD are examples of such banks. They engage themselves in some
specific area or activity and thus, are called specialised banks. Let us know
about them.

i. Export Import Bank of India (EXIM Bank): If you want to set up a business
for exporting products abroad or importing products from foreign countries for
sale in our country, EXIM bank can provide you the required support and
assistance. The bank grants loans to exporters and importers and also provides
information about the international market. It gives guidance about the
opportunities for export or import, the risks involved in it and the competition to
be faced, etc.

ii. Small Industries Development Bank of India (SIDBI): If you want to

establish a small-scale business unit or industry, loan on easy terms can be
available through SIDBI. It also finances modernisation of small-scale industrial
units, use of new technology and market activities. The aim and focus of SIDBI
is to promote, finance and develop small-scale industries.

iii. National Bank for Agricultural and Rural Development (NABARD): It is a

central or apex institution for financing agricultural and rural sectors. If a person
is engaged in agriculture or other activities like handloom weaving, fishing, etc.
NABARD can provide credit, both short-term and long-term, through regional
rural banks. It provides financial assistance, especially, to co-operative credit, in
the field of agriculture, small-scale industries, cottage and village industries
handicrafts and allied economic activities in rural areas.

 Functions:-
1. To supplement the work of commercial banks by providing services that are
not accepted by commercial banks and private investment medium and long
term.
2. To contribute to development in their areas of specialization.
3. To initiate cooperation with various parties in order to achieve certain goals,
contributions, start the wheels of development in different sectors.
4. To provide the necessary funding for key sectors of the economy with low
interest rates or no interest rates.
5. To provide technical consultation and training courses, training for workers
in agriculture and industry to increase their competence and to inform them
of the results of research and development in these areas.
6. To encourage the establishment of specialized companies entrusted with the
implementation of the agricultural and industrial projects, as well as a
construction of flats.
7. To work towards the establishment of various cooperatives this will help in
the marketing of agricultural and industrial projects.
8. To find the area of investment in these vital projects.
 Conclusion

Banking systems have been with us for as long as people have been using
money. Banks and other financial institutions provide security for individuals,
businesses and governments, alike. Let's recap what has been learned with this
tutorial: 

In general, what banks do is pretty easy to figure out. For the average person
banks accept deposits, make loans, provide a safe place for money and
valuables, and act as payment agents between merchants and banks.

Banks are quite important to the economy and are involved in such economic
activities as issuing money, settling payments, credit intermediation, maturity
transformation and money creation in the form of fractional reserve banking.

To make money, banks use deposits and whole sale deposits, share equity and
fees and interest from debt, loans and consumer lending, such as credit cards.

In addition to fees and loans, banks are also involved in various other types of
lending and operations including, buy/hold securities, non-interest income,
insurance and leasing and payment treasury services.

History has proven banks to be vulnerable to many risks, however, including

credit, liquidity, market, operating, interesting rate and legal risks. Many global
crises have been the result of such vulnerabilities and this has led to the strict
regulation of state and national banks.
 Bibliography

1. Banking law and practice in india , M. L. Tannan

2. www.legalarticle.com
3. www.yourarticlelibrary.com
4. www.thebalance.com