Module 5

What is a bank?

 A bank is a financial institution that provides various financial services, including accepting deposits, providing
loans, facilitating financial transactions and providing investment options like mutual funds and stocks.
 Banks offer various types of accounts, including savings accounts, current accounts, fixed deposits (FDs), and
more, each serving different purposes and earning potential.

 Banking Regulation Act of 1949 defines banking as “accepting for the purpose of lending or investment, of
deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order
or otherwise”.

Functions of Banks

Some of the major functions of banks are mentioned below:

 Accepting Deposits: Banks provide a safe place for individuals and businesses to deposit their money,
which can be withdrawn when needed.

 Providing Loans: Banks lend money to individuals and businesses for various purposes, such as home
mortgages, business expansion, or personal loans.

 Payments and Settlements: Banks enable transactions through various payment methods, like checks,
debit/credit cards, and electronic transfers.

 Currency Exchange: Many banks offer foreign exchange services, allowing customers to buy, sell, or
exchange foreign currencies.

 Safekeeping of Valuables: Some banks offer safe deposit boxes for customers to securely store valuable
items and documents.

 Investment Services: Banks also provide investment products like mutual funds, stocks, and bonds,
helping customers grow their wealth.

 Internet Banking Services: Banks offer online and mobile banking services, making it convenient for
customers to access their accounts, pay bills, and transfer funds.

Types of Banks in India

On the Basis of Functions:

1. Commercial Banks

2. Industrial Banks

3. Regional Rural Banks

4. Exchange Banks

5. Central Bank

On the Basis of Ownership:

1. Public Sector Banks

2. Private Sector Banks

3. Co - operative Banks

C. On the Basis of Schedules of RBI:

1. Scheduled Bank

2. Non - Scheduled Bank

The Banking System in India is divided into several types, each serving specific functions and purposes.

Banking Classification in India

Types of Banks Sub-types

Central Bank -

Commercial Banks a) Private Sector Banks

b) Public Sector Banks
c) Regional Rural Banks
d) Foreign Banks

Co-operative Banks a) State Co-operative Banks

b) Urban Co-operative Banks

Payment Banks -

Small Finance Banks -

 Scheduled Banks -

Non-scheduled Banks -

Central Bank

The Reserve Bank of India (RBI) serves as the Central Bank of India and is responsible for regulating and
controlling the monetary and banking system in the country.

Reserve Bank of India:

Reserve Bank of India was established in 1935. It is the central bank of India. The following are the main
objectives of RBI:

(a) To manage and regulate foreign exchange.

(b) To build a sound and adequate banking and credit structure.

(c) To promote specialized institutions to increase the term finance to industry.

(d) To give support to government and planning authorities for the economic development of the country.

(e) To control and manage the banking system in India.

(f) To execute the monetary policy of the country.

Functions of RBI:

1. Issue of currency note: RBI is the sole authority for the issue of currency notes in India except one rupee coin,
one rupee note and subsidiary coins. These notes are printed and issued by the issue department.

2. Banker to the Government: RBI acts as the banker and agent of the government. It gives the following services:
a) It maintains and operates the government cash balances.

b) It receives and makes payments on behalf of the government.

c) It buys and sells government securities in the market.

d) It sells treasury bills on behalf of the government.

e) It advises the government on all banking and financial matters such as financing of five year plans, balance of
payments etc.,

f) It acts as the agent of the government in dealings with International Monetary Fund, World Bank International
finance Corporations, EXIM Banks etc.

3. Bankers’ Bank: As per the Banking Regulation Act 1949, every bank has to keep certain minimum cash balance
with RBI. This is called as Cash Reserve ratio. The scheduled banks can borrow money from the reserve bank of
India on eligible securities and by rediscounting bills of exchange. Thus it acts as bankers’ bank.

4. Controller of Credit: RBI controls money supply and credit to maintain price stability in the country. It controls
credit by using the following methods:

2) Commercial Banks

These are the most common types of banks and include public sector banks, private sector banks, and foreign
banks. They provide various services like savings and current accounts, loans, and investments.

These are the most common types of banks and include public sector banks, private sector banks, and foreign
banks. They provide various services like savings and current accounts, loans, and investments.

Commercial Banks in India

Public Sector Banks

Here is a list of public sector banks in India:

 Bank of Maharashtra
  Indian Bank

 Bank of Baroda

 Canara Bank

 State Bank of India

 Central Bank of India

 Union Bank of India

 Indian Overseas Bank

 UCO Bank

 Punjab & Sind Bank

 Bank of India

 Punjab National Bank

 Public Sector Banks: Owned and operated by the government, examples include State Bank of India (SBI),
Punjab National Bank (PNB), and Bank of Baroda (BOB).

 Private Sector Banks: These are privately owned and managed banks, such as HDFC Bank, ICICI Bank, and
Axis Bank.

 Foreign Banks: These banks have branches in India and are headquartered in foreign countries. Some
examples are Citibank, Standard Chartered, and HSBC.

 Regional Rural Banks (RRBs): These banks cater to rural and semi-urban areas and are owned by the
government, commercial banks, and state governments.

Cooperative Banks
A Co-operative Bank is registered under the Co-operative Societies Act of 1912 and is run by an elected managing
committee. It works on a non-profit, no-loss basis and mainly serves entrepreneurs, small businesses, self-
employment, and more in urban areas.

In rural areas, it mainly functions to finance agriculture-based activities like farming, livestock, and hatcheries.
There are mainly two types of Co-operative Banks:

Types of Description
Cooperative
Bank

State Co- A State Co-operative Bank is a federation of the central Co-operative banks that will
operative Banks act as a custodian of the Co-operative banking structure in the State.

Urban Co- The Urban Co-operative Bank is the primary Co-operative bank located in urban and
operative Banks semi-urban areas. The banks essentially lent to smaller borrowers, and businesses
centred around a community, locality, and more.

4) Payment Banks

The payment banks are a relatively new banking model in the country that has been conceptualised by the RBI.
This bank is allowed to accept a restricted deposit. This amount is limited to Rs. 1 lakh for a customer. The bank
also offers services such as ATM cards, net banking and more.

5) Small Finance Banks

These banks primarily serve the unserved and underserved sections of the population, including small businesses
and low-income individuals.

This type of bank is licensed under Section 22 of the Banking Regulation Act 1949, and it is governed by the
Provisions Act of 1934.

Here are a few examples of Small Finance Banks in India:

 AU Small Finance Bank Ltd.

  Utkarsh Small Finance Bank Ltd.

 Fincare Small Finance Bank Ltd.

 Ujjivan Small Finance Bank Ltd.

 Jana Small Finance Bank Ltd.

 ESAF Small Finance Bank Ltd.

 Suryoday Small Finance Bank Ltd.

 Equitas Small Finance Bank Ltd.

 Capital Small Finance Bank Ltd.

 North East Small Finance Bank Ltd.

6) Scheduled Banks

These banks are covered under the 2nd Schedule of RBI Act 1934, and they need to have a paid-up capital of Rs. 5
lahks or more.

7) Non-Scheduled Banks

The non-scheduled banks are local area banks that are not listed in the 2nd Schedule of the RBI Act 1934.

Types of Bank Accounts in India

Banks offer several types of bank accounts to cater to different financial needs. These bank accounts vary from
one another based on the purpose, transaction frequency and location.

Given below are the common types of bank accounts in India:

 Savings Account: This is a basic account for individuals to save money. It offers interest on deposits and
allows limited withdrawals.

 Current Account: This type of account is mainly used by businesses. It has zero or very low interest rates
but offers more transaction features, making it suitable for frequent transactions.

 Fixed Deposit Account: In this account, you deposit a lump sum for a fixed tenure at a higher interest rate
compared to savings accounts. Funds are locked in until maturity.
  Recurring Deposit Account: It is a savings plan where you deposit a fixed amount every month, and at the
end of a specified period, you receive the principal and interest.

 NRI (Non-Resident Indian) Account : These are for Indians living abroad. NRE (Non-Resident External),
NRO (Non-Resident Ordinary) and FCNR (Foreign Currency Non-Residential) accounts are major types
of NRI accounts.

 Senior Citizen Savings Account: Created for senior citizens, these accounts offer higher interest rates and
additional benefits.

 Salary Account: This account is used by an employer to credit the salary of an employee every month. It
does not have any minimum balance requirement.

 Demat Account: This account is created primarily for holding and trading in securities electronically, such
as stocks and bonds.

 Joint Account: It is shared by two or more individuals, often used for family or business purposes.

 Minor Account: Opened on behalf of minors by parents or guardians. The minor gains control upon
reaching a certain age.

 Corporate Account: Used by companies and corporations for their banking needs, including payroll and
transactions.

What are the Types of Loans?

Based on their availability, there are many Types of Loans available across the public and private sector banks in
India. Given below are the classification of the five types of loans:

o
o Secured Loans
o Loans against fixed deposits
o Home loans
o Gold loans
o Loans against property
o Unsecured Loans
o Personal loans
o Short-term business loans
o Vehicle loans
o Education loans
o Demand Loans
o Subsidized Loans
o Concessional Loans
o Others
 o Term loans
o Bank overdraft facility
o Letter of credit
o Bank guarantee
o Lease finance
o SME collateral-free loan
o Construction equipment loan
o SME credit card

There are mainly two types of loans and advances provided by commercial banks:

1. Unsecured loans : These loans does not require any collateral in the form of security. It includes:

(a) Call loans: Call loans refers to loans that the lender can demand to be repaid at any time and does not require monthly
or quarterly payments. The rate of interest in case of call money is known as call loan rate which is the lowest among all
other loans.

(b) Short term loans: Short term loans refers to loans that runs for 1 to 12 months and does not requires monthly or
quarterly payments.The rate of interest charged on short term loans is more than what is charged in call money.

(c) Medium term loans: Medium term loans refers to loans that runs for one to 3 years and requires monthly or quarterly
payments.The rate of interest charged on medium term loans is more than what is charged in short term loans.

2. Secured loans: These loans require collateral in the form of security to raise it. It includes long term loans which refers to
loans that runs for 3 to 25 years which needs some collateral and requires monthly or quarterly payments.The rate of
interest charged on long term loans is the highest in comparison to any other type of loan.

Types of Mortgages

Discussed below are the different types of mortgages:

 Simple Mortgage: In such type of mortgage, the borrower needs to sign an agreement stating that if
he/she is unable to pay back the borrowed amount in specified time duration, then the lender can sell
the property to anyone to get his money back
 Mortgage by Conditional Sale: Under such mortgage, the lender can put a certain number of conditions
which the borrower must follow in terms of repayment. These conditions may include the sale of the
property if there is a delay in the monthly installments, an increase in the rate of interest due to delay in
repayment, etc.
 English Mortgage: In this type of mortgage, the borrower has to transfer the property in the name of the
lender at the time of taking money, at a condition that the property would be transferred back to the
borrower once the complete amount is paid back
  Fixed-Rate Mortgage: When the lender assures the borrower that the rate of interest will remain the
same throughout the loan period is called Fixed-Rate Mortgage
 Usufructuary Mortgage: This kind of mortgage gives a benefit to the lender. The lender has the right over
the property for the due course of the loan period, he can put the property on rent or use it for other
purposes until the repayment of the amount. But the main rights lie with the owner himself
 Anomalous Mortgage: A combination of different types of mortgages is called an Anomalous Mortgage
 Reverse Mortgage: In this case, the lender lends money to the borrower on a monthly basis. The entire
loan amount is divided into instalments and the lender gives the borrower that money in instalments
 Equitable Mortgage: In this type of mortgage, the title deeds of the property are given to the lender. This
is a common phenomenon in the banking mortgage loans. It is done to secure the property

Types of Cheque
In this article, we shall discuss in detail what is a cheque, various types of cheques that are issued in the Indian
banking system and what are the features of each of them.

Aspirants can check the linked article for the latest government exams in India.

There are various types of cheques that can be issued. Given below is the list of the various cheque types:

1. Bearer Cheque
2. Order Cheque
3. Crossed Cheque
4. Account Payee Cheque
5. Stale Cheque
6. Post Dated Cheque
7. Ante Dated Cheque
8. Self Cheque
9. Traveler’s Cheque
10. Mutilated Cheque
11. Blank Cheque

What is a Cheque?
A cheque is a piece of document/paper which orders the bank to transfer money from the bank account of an
individual or an organisation to another bank account.

The person who writes the cheque is called the “drawer” and the person in whose name the cheque has been issued
is called the “payee”. The amount of money that needs to be transferred, payee’s name, date and signature of the
drawer are all mentioned in a cheque.

There are certain points to remember regarding cheques which are mentioned below:

1. A cheque can only be issued against a current or savings bank account

 2. A cheque without date shall be considered invalid
3. Only the payee, in whose name the cheque has been issued, can encash it
4. A cheque is only valid 3 months from the date it has been issued
5. A 9-digit MICR (Magnetic Ink Character Recognition) code is mentioned at the bottom of the cheque. This
makes the clearance of cheques easier for the banks.
Further below each type of cheque has been discussed in detail for candidates to study and prepare themselves for
the upcoming Government exams.

Bearer Cheque
The bearer cheque is a type of cheque in which the bearer is authorised to get the cheque encashed. This means the
person who carries the cheque to the bank has the authority to ask the bank for encashment.

This type of cheque can be used for cash withdrawal. This kind of cheque is endorsable. No kind of identification
is required for the bearer of the cheque.

For example: A cheque has been signed by Arjun (drawer) and the payee for the cheque is Varun. Varun can
either go to the bank himself or can send a third person to get encashment for the cheque. No identification shall be
required for the bearer’s name.

If a person does not want their cheque to be endorsable, they can strike off the “OR BEARER” option mentioned
in the cheque.

Order Cheque
This type of cheque cannot be endorsed, i.e., only the payee, whose name has been mentioned in the cheque is
liable to get cash for that amount. The drawer needs to strike the “OR BEARER” mark as mentioned on the cheque
so that the cheque can only be encashed to the payee.

For Example: If a cheque has been signed with the name of Varun, then only the payee can visit the bank to get an
encashment for the same for a order cheque.
The payee’s identity may be cross-checked by the bank before encashing the sum of money.

Crossed Cheque
In this type of cheque, no cash withdrawal can be done. The amount can only be transferred from the drawer’s
account to the payee’s account. Any third party can visit the bank to submit the cheque.

In case of a crossed cheque, the drawer must draw two lines at the left top corner of the cheque.

Account Payee Cheque

This is the same as the account payee cheque but no third party involvement is required. The amount shall be
transferred directly to the payee’s account number.

To ensure that it is an account payee cheque, two lines are made on the left top corner of the cheque, labelling it for
“A/C PAYEE”.

Stale Cheque
In India, any cheque is valid only until 3 months from the date of issue. So if a payee moves to the bank to get
withdrawal for a cheque which was signed 3 months ago, the cheque shall be declared a stale cheque.

For example: If a cheque is dated January 1, 2021, and the payee visits the bank for withdrawal on May 1, 2021,
his/her request shall be denied and the cheque is declared stale.

Post Dated Cheque

If a drawer wants the payee to apply for withdrawal or transfer of money after the present date, then he/she can fill
a post dated cheque.

For example: If the date on which the drawer is filling the cheque is May 10, 2021, but he wants the payment to
be done later, he/she can fill the cheque dates as May 30, 2021. It shall be called a post-dated cheque.

Ante Dated Cheque

If the drawer mentions a date prior to the current date on the cheque, it is called ante dated cheque.

For example: If the current date is January 30, 2021, and the drawer dates the cheque as January 1, 2021. It shall
be considered as an ante-dated cheque.

Other Related Preparation Links:

Self Cheque
If the drawer wishes cash for himself he can issue a cheque where in place of the Payee’s name he can write
“SELF” and get encashment from the branch where he owns an account.

For example: If a person wants Rs.1,00,000/- in cash, he can issue a self cheque and visit his bank branch where
he owns an account and get encashment in place of a cheque.

Traveller’s Cheque
As the name suggests, the Traveler’s cheque can be used when a person is travelling abroad where the Indian
currency is not used.

If a person is travelling abroad, he can carry the traveller’s cheque and get encashment for the same in abroad
countries.

Mutilated Cheque
If a cheque reaches the bank in a torn condition, it is called a mutilated cheque. If the cheque is torn into two or
more pieces and the relevant information is torn, the bank shall reject the cheque and declare it invalid, until the
drawer confirms its validation.

If the cheque is torn from the corners and all the important data on the cheque is intact, then the bank may process
the cheque further.

Blank Cheque
When a cheque only has a drawer’s signature and all the other fields are left empty, then such a type of a cheque is
called a blank cheque.

The above-mentioned types of cheques are the most commonly known and used in the Indian banking industry. Let
us now know the parties associated with a cheque.

Number of Parties involved with a Cheque

There are three parties involved with a cheque.

1. Drawer or Maker – Drawer of the cheque is the customer or account holder who issues the cheque.
2. Drawee – Drawee is basically the bank on which the cheque is drawn. Remember that a cheque is always
drawn on a particular banker.
3. Payee – This is the person who is named in the cheque and gets the payment for the amount mentioned
in the cheque. In particular cases (when the drawer writes a self-cheque), the drawer and the payee can
be the same individual.
Apart from these three, there are two more parties involved with a cheque –

1. Endorser: When a party i.e. payee transfers his right to take the payment to another party, he/she is
called endorser.
2. Endorsee: The party in whose favour, the right is transferred, is called endorsee.

Essentials of a Cheque
There are certain extremely important pointers or features of a cheque which should be known and understood
before using this payment mode for money transfer. Some of the important pointers related to a cheque are:

 A cheque is an unconditional order.

 A cheque’s payment is always in cash.
 A cheque is always drawn on a particular Bank.
 A cheque is always payable on demand.
 Signature on the exchequer is mandatory and should be only by the maker.
 The amount is always a certain sum of money from one’s account.
 This cash amount is to be paid to the person mentioned therein, or order, or the bearer.
 Different Types Cards Banking Awareness
Cards can be classified on the basis of their issuance, usage, and payment by the cardholder. There are
three types of cards:

1) Debit Cards

Debit Cards are the payment cards that provide the electronic access to the cardholder to his bank
account. These cards are issued by the banks and linked to bank account. Debit Cards are used to

 Withdraw cash from an ATM

 Purchase of goods and services at the point of sale both domestically and internationally
provided it is enabled for international use.

Currently, debit cards can be used in two types:

1. Online Debit Card- In an online debit card system there is a need for electronic authorization which
reflects every user’s transaction in his account. Transactions in this system are secured by the PIN
(Personal Identification Number).

2. Offline Debit Card- In offline cards, there is a daily limit or maximum limit as per the current account of
the customer. These transactions take 2-3 days to reflect in the customer’s transaction.

2) Credit Cards

Credit Cards are the plastic cards which are issued by banks and other entities approved by the RBI to
pay a merchant for goods and services. The cards are used for

 Purchase of goods and services and E-commerce through interactive voice response and
recurring transactions.

 These cards can use domestically and internationally provided it is enabled for international use.

 The cards can be used to withdraw cash from an ATM and for transferring funds from bank
accounts, debit cards, credit cards, and prepaid cards.

3) Prepaid Cards

Prepaid cards are issued by banks /nonbanks against the value paid in advance by the cardholder and
stored in such cards which can be issued as smart cards or chip cards, internet wallets, mobile
accounts, etc. maximum limit that can be stored in any prepaid card at any point of time is Rs50000. The
usage of prepaid credit cards depends on who has issued the cards. These cards can be used for

 Withdraw cash from ATM.

 Purchase of goods and services at the point of sale/E-commerce.

 For domestic fund transfer from one person to another.

Other Types of Cards:

1) Smart Card

It contains an electronic chip that is used to store cash. There is no requirement of any signature,
identification and payment authorization. The exact amount is deducted from the smart card during
payment and is collected by the smart card reader machines.

2) Co-Branded Cards

A credit card that is offered by the credit card company that is jointly sponsored by bank and a retail
merchant. These cards generally covered with a variety of incentives such as discounts and rebates.

3) Rupay Card

Rupay Card is the Indian version of debit/credit card. It is similar to international cards such as Master
and Visa. It is launched by NPCI (National Payment Corporation of India) in India. All major public sector
banks have started issuing Rupay Card. Benefits of Rupay card:

 Transaction cost is reduced with the help of the Rupay card.

 Users get alerts for every transaction made through this card.

 The processing fee of the Rupay card is considerably low as compared to other credit/debit
cards.

4) Kisan Credit Cards

Kisan Credit Cards is a scheme to provide timely and credit to farmers to meet their production credit

needs besides meeting contingency expenses and

expenses related to ancillary activities through a simplified procedure. The Kisan Credit Card offering
credit to farmers in two types:

What is Insurance?
Represented in a form of policy, Insurance is a contract in which the individual or an entity gets the
financial protection, in other words, reimbursement from the insurance company for the damage (big or
small) caused to their property.

The insurer and the insured enter a legal contract for the insurance called the insurance policy that
provides financial security from the future uncertainties.
 In simple words, insurance is a contract, a legal agreement between two parties, i.e., the individual
named insured and the insurance company called insurer. In this agreement, the insurer promises to
help with the losses of the insured on the happening contingency. The insured, on the other hand, pays
a premium in return for the promise made by the insurer.

The contract of insurance between an insurer and insured is based on certain principles, let us know the
principles of insurance in detail.

Principles of Insurance
The concept of insurance is risk distribution among a group of people. Hence, cooperation becomes the
basic principle of insurance.

To ensure the proper functioning of an insurance contract, the insurer and the insured have to uphold
the 7 principles of Insurances mentioned below:

1. Utmost Good Faith

2. Proximate Cause
3. Insurable Interest
4. Indemnity
5. Subrogation
6. Contribution
7. Loss Minimization

What is a Banking Ombudsman?

The Banking Ombudsman is a position created by the Government of India to address the issues and complaints
of the customers. A senior, experienced official appointed by the Central Bank of India, that is, the Reserve Bank
of India, to offer redress and offer amends, if possible, to the consumer complaints regarding the shortcomings in
the banking sector.

In simple words, Banking Ombudsman is a designation, a position created by the Government of India that works
as an RBI complaint number where the customers who are dissatisfied with the services received can lodge their
complaints.

The roles and responsibilities of the Banking Ombudsman

The Banking Ombudsman is a significant position and is a step in the right direction toward consumer complaints
and redressal. The powers and duties of a Banking Ombudsman are vast and comprehensive. It performs several
tasks and has control over a number of things which include:

 A Banking Ombudsman is responsible for matters relating to non-payment or delay in collection of cheques, bills,
drafts, etc.
 He/she is also responsible for matters concerning the non-acceptance of small denomination notes or coins
without sufficient cause or justified reason. He is also responsible for registering complaints and ensuring action if
someone is charging fees for such services.

 Failure to issue or delay in issues of banker’s cheques, non-adherence to working hours; failure of banks in
providing a banking facility promised by giving in writing; failing to honour guarantee or letter of credit
commitments all fall under the ambit of the responsibilities of a Banking Ombudsman.

 Matters relating to non-acceptance of payments towards taxes as prescribed by the RBI or the Government of
India or forced closure of deposit accounts without prior notice and without sufficient justified reasons fall under
the responsibilities of a Banking Ombudsman.

 A Banking Ombudsman receives complaints regarding non-adherence to any of the banking guidelines laid down
by the RBI. It also looks after matters concerning maintenance of banking records and transactions, as well as
maintenance of their accounts by OCI cardholders and NRIs.

INFLATION

It is nothing but an increase in the general level of price of the goods and/ or services in an economy over a
certain period of time. As per the law of Economics, when the general level of prices increase, each unit of
currency buys a decreased number of goods and services. Hence, inflation also reflects a decrease in the
purchasing power of money.

In the world of Economics, the word ‘inflation’ literally means a general price rise against a standard level of the
purchasing power. As per Crowther’s findings, “Inflation is a state in which the value of money is falling and the
prices are rising”.

Inflation Deflation
Definition
Inflation is defined as the increase in the price Deflation is termed as the decrease in price
levels of goods and services in an economy levels of goods and services in an economy
Impact on demand
Demand for products and services increase in Demand for products and services decrease in
inflation deflation.
Impact on National Income
No impact on national income National income declines as a result of
deflation
Consequences seen
Distribution of income is not equal as a result There is a rise in level of unemployment in the
of inflation nation as a result of deflation
Is it beneficial?
Moderate levels of inflation is considered good Calculated based on only the amount that is
for the economy availed
Impact on Purchasing Power of Money
Decreases the purchasing power of money Increases the purchasing power of money