Sunday, February 28, 2016

AHSEC - Class 11: Unit 1 Nature and Organisation of Bank

1. How the word Bank has been originated?
Ans: The word Bank has been originated from many words. There is no single word or answer to this origin of the word ‘Bank’. According to some economists, the word ‘Bank’ has been originated from the German word ‘Banck’ which means heap or mound or joint stock fund. From this, the Italian word ‘Ban co’ has been derived. It means heap of money. But according to this group, the word bank is derived from the Greek word ‘Banque’ which mean a ‘bench’. It refers to a place where money-lenders and money changers used to sit and display their coins and transact business. Thus the origin of the word ‘Bank’ can be traced as follows.
Bank → Banco → Banque → Bank
2. What is a Bank?
Ans: In simple words, we can say that Bank is a financial institution that undertakes the banking activity i.e.it accepts deposits and then lends the same to earn certain profit.
3. What are the features of Bank?
Ans: The features of a Bank are:
a)      A Bank is a profit seeking commercial enterprises.
b)      It deals in money, i.e., it accepts deposits from the public and advances loans to the needy borrowers.

c)       It deals with credit. It create credit for the purposes of lending money.
d)      The deposits made with the bank are repayable on demand and can be withdrawn by the depositor by means of any instruments whether a cheque or otherwise.
4. What are the functions of Modern Commercial Banks?
Ans: The functions of modern commercial banks are divided into two categories. They are :- Primary Functions and Secondary Functions.
5. What are Commercial Banks?
Ans: Commercial Banks are the financial institution which accepts deposits from different institutions and advances loans to some other institutions.
6. What are the primary functions of a Bank?
Ans: The primary functions of a Bank are:
a)      Acceptance of Deposits: It is the most important function of a bank. According to this function, the commercial bank accepts deposits from different individuals and organizations. The bank accepts deposits from them and provides all securities to them.
b)      Making loans and advances: The second important function of bank is advancing loan. The commercial banks earn interest by lending money.
c)       Investment of funds: Besides loan and advances, banks also invest a part of its funds in govt. and industrial securities. Banks purchases both govt. and industrial securities like govt. bills, share, debentures, etc from their market.
d)      Credit Creations: The banks create credit. When a bank advances a loan, it does not give cash to the borrower. It opens an account in the name of the borrower. The borrower is allowed to withdraw money by cheque whenever he needs. This is known as Credit Creation.
7. What are the Secondary functions of a bank?
Ans: The secondary functions of a bank are:
a)      Agency functions: These functions are performed by the banker for its own customer. For these services, the bank charges certain commission from its customers. These functions are :-
a.       Remittance of funds.
b.      Collection and payment of credit instruments.
c.       Execution of standing orders.
d.      Purchase and sale of securities.
e.      Collection of Dividend and interest
f.        Income tax consultancy.
b)      General Utility functions: These are certain utility functions performed by the modern commercial bank to its customer for the community. These are:
a.       Safe custody of valuables.
b.      Issuing letters of credit.

c.       Gift Cheques.
d.      Dealing in foreign exchange.
e.      Credit cards.
f.        Collection of statistics.
8. What are the different types of Bank deposit accounts?
Ans: The different types of Bank deposit accounts are:
a)      Fixed Deposits Accounts: It is an account where money is deposited fro a fixed period of time. The money so deposited cannot be withdrawn before the expiry of the term. The rate of interest is higher in this account as compared to other accounts.
b)      Savings bank deposits Accounts: In these accounts, money may be deposited at any number of times. However, restrictions are put on withdrawals from this account. The rate of interest paid on this very low as compared to fixed deposits.
c)       Current deposits account: It is also knows as running account. In this account, money can be deposited and withdraw any number of times, without any restrictions. Generally, no interest is paid on this account because the banker has to keep the cash ready at all times to meet the requirements of the depositors. Such accounts are maintained by business and other firms.
9. What are the various forms of loans and advances granted by a bank to drawer?
Ans: The various forms of loans and advances that The bank grants to a drawer are:
a)      Ordinary loans: The money or specific amount landed by a bank to a borrower with or without security is known as loan or Ordinary loan. It is given for a fixed period and interest is charged on the entire amount of loan from the date sanction.
b)      Cash Credit: The agreement by which a bank allows his customer to borrow money up to a certain limit against some tangible securities is knows as Cash Credit. Interest is charged on the actual amount utilized by the borrower and for the period of actual utilization only.
c)       Overdrafts: The agreement with a bank by which a current account holder is allowed to withdraw money more than his balance up to certain limit is known as Overdraft. The customer has to pay interest on the amount overdraw by him.
d)      Purchasing and discounting of bills: It is the most important function of the bank in which a bank lends money without any collateral security. In this case, the customer having a bill gets immediate finance from the bank and has not had to wait till the maturity of the bill.
10. What are two types of Bank deposits?
Ans: The two types of Bank deposits are: Primary deposits and Derivative deposits.
11. What are Primary deposits?
Ans: The money deposited by a depositor in different deposits account such as savings account etc,. are known as Primary Deposits. These are also knows as Passive deposit or cash deposits.
11. What are Derivative deposits?
Ans: Derivative deposits are those which are created by the bank while lending money. It is also called secondary deposit or passive deposit.
12. What is credit creation? What are the limitations of the credit creation process of commercial banks? Discuss.

Ans: The banks create secondary deposits or derivation from the primary deposits. This creation of derivative deposits is known as Credit Creation.
The limitations of the credit creation process of commercial banks are:
a)      Availability of primary deposits: The commercial banks create credit only on the basis of primary deposits. They cannot create a large number of credits from a small primary deposit.
b)      Requisite cash reserve ratio: The size of the credit multiplier is inversely related to the cash reserve ratio. The higher the ratio, the smaller will be volume of excess reserve available and smaller will be volume of credit creation and vice versa.
c)       Banking habits of the people: The banking habit of the people also sets the limit for the capacity of banks to create credit. If the people don’t have banking habit and prefer to transact by cash and not by cheque, then multiple credit creation of the bank will not be possible.
d)      Availability of good collateral security: The availability of collateral securities also places a limit on credit creation of banks. If securities are not available in sufficient number, the banks cannot expand their lending activities and thus, cannot create credit.
e)      Credit policy of the Central Bank: The extent of credit creation also depends on the monetary policy of the Central bank. The Central bank provides a limit to the commercial banks to create credit and they are bound to follow it.

13. Explain the process of credit creation.
Ans: Money is said to be created when the banks, through their lending activity, make net addition to the total supply of money in the economy. Thus, the giving of loans by the banks in the form of derivates deposits leads to the creation of money. The modern banks create deposits in two ways.
Firstly, in a passive way which results in primary or passive deposits.
Secondly, in a more active way which results in active or derivative deposits.
The bank creates passive when it opens a deposits account in the name of the customer who brings cash or cheques to be credited to his account. In this case, the rate of the bank is merely passive as it accepts the cash or the cheques brought by the customers and deposited them in his account. It is the primary deposits which later on form the basis of loan transaction by the bank. These primary deposits do not make any net addition to the stock of money in the economy. After keeping a small percentage of these deposits in cash, the bank utilities the balance for making loans and advances to the customer. The percentage of the primary deposits kept by the bank in cash is known as cash Reserve Ratio. The creation of these deposits can be explained with the help of an example.
Let us suppose that the bank grants a loan of Rs. 20,000 to his customers against some collateral security. What the bank actually does it that it opens an account in the name of the borrower and credit Rs. 20,000 to it. In any case, the bank does not pay Rs. 20,000 to the borrower in cash. The borrower may either withdrawn the entire amount at once or he may withdraw small accounts of money from time to time according to his requirements. Thus, by making a loans the bank has at the sometime created a new deposits in its books.
                Hence, the well-known maxim is that “Every loan creates a deposit”. Such actively created deposits lead to a net increase in the total supply of money in the economy. The active deposits are also created by the bank when it purchases securities or other forms of assets from the public. The actual process of multiple creation of credit may be explained thus :-
                When a bank grants a loans to the borrowers, the loan money is created to his deposits account. Supposing, the borrower pays to his creditor, in connection with some business transaction, a cheque drawn upon his account with the bank. Let us further suppose that the creditor deposits the cheque in another bank in his account. The other bank now receives the primary deposits in the form of a cheque drawn upon the first bank. After keeping some cash as cash ratio the second bank may create another derivative deposit by giving loans to some borrowers. The second borrowers may make the payment to another creditor who happens to have a deposit account with the third bank. The third bank will know receive the primary deposits in the form of cheque drawn on the second bank. This process may be repeated until the total volume of derivative deposits created by all the banks would be a multiple of the initial amount created by the first bank.

14. Describe various departments of a commercial bank.
Ans: The different department of a commercial bank are discussed below:
a)      Secretary department: It is concerned with secretarial work such a organising meeting, preparation of agenda etc.
b)      Law department: It is concerned with legal problems.
c)       Accounts department: It prepares and maintain all the books of accounts like profit and loss account, balance sheet etc.
d)      Personal department: It is concerned with selection, training, appointment, salary and pension of staff.
e)      Investments department: This department formulates investment principles of the bank.
f)       Loans and advances department: This department formulates lending principles of the bank.
g)      Inspection department: This department looks after the working of different departments  and takes necessary steps for its improvement.
h)      Regional or branch department: This department looks after the different regional or branch office of the bank. It is responsible for effective functioning of various branches.
15. What are the essentials for opening a new branch?
Ans: Opening a new branch: According to section 23 of the Banking Regulation Act, 1949, a bank can open a new branch within the same city, town or village in which its operates. But for opening a new branch in a new place, permission of RBI is necessary. Before granting  permission for opening new branches the RBI will satisfy itself regarding the following:
a)      The general character of the management
b)      The financial condition
c)       The adequacy of capital structure and
d)      The earning prospects of the banking company
The RBI may also cancel the permission for opening a new branch if it is of the opinion that the banking company is not complying with the required conditions.
16. Give the meaning of Cash Reserve Ratio.
Ans: The Cash Reserve Ratio refers to the portion of total deposits of a commercial bank which it has to keep with the RBI in the form of cash reserves. Present CRR is 4%.
17. State the provisions for issuing and cancellation of license to commercial banks.
Ans: According to Sec. 22 of the Banking Regulation Act, 1949, no banking company can carry on banking business unless it holds a license granted by the RBI. Before granting license, the RBI may look into the following matters:
a)      The bank is or will in position to pay to the depositors in full.
b)      The affairs of the bank should not conducted in a way which is detrimental to the interest of its depositors.
c)       In case of foreign bank, the carrying of banking business will be in the public interest.
d)      Financial position of the bank is sound.
Cancellation of the license: The RBI has been empowered to cancel a license granted to a banking company if:
a)      The company ceases to carry on banking business in india or
b)      Any of the conditions imposed by the RBI is not complied with by the banking company.
A banking company whose license has been cancelled may appeal to the central government within 30 days.
18. What do you mean by organisation and management of a bank?
Ans: Organisation of a bank is divided into two parts: Internal and External Organisation. Internal organisation of a bank refers to the organisation which establishes a structural relationship between different working groups and between different departments. Internal organisation of a bank is shown in the following sequence Top to bottom):
Board of directors
Managing director
General manager
Deputy general manager
Departmental head or officer
External organisation of a business concern means legal and constitutional form of a business organisation. It is based on ownership division. Example of external organisation is sole trade, partnership, company, state enterprises etc. In India, a commercial bank is set up as joint stock companies under the Companies Act and sole trade and partnership basis is not allowed.
Management of banking company: According to sec.10 the Banking Regulation Act 1949, no banking can employ or be managed:
a)      By a managing agent or
b)      By a declared insolvent  or
c)       By a person convicted of criminal offense or
d)      By a person of unsound mind or
e)      By a person who is engaged in any other business or
f)       By a person whose remuneration is excessive in the opinion of the RBI.
These provisions are framed to check unhealthy manipulation.
Short Questions
1. Mention the names of the Presidency Banks?
Ans: (i) The Bank of Bengal (1809). (ii) The Bank of Bombay (1840) and  (iii) The Bank of Madras (1843).
2. In which year the Imperial Bank of India Act was passed? Ans: The Imperial Bank of India Act was passed in 1920.
3. In which year the Imperial Bank of India came into existence? Ans: On 27th January 1921.
4. In which year the Imperial Bank of India was nationalized? Ans: On July 1, 1955.
5. In which year the RBI act was passed? Ans: The RBI act was passed in 1934.
6. In which year RBI came into existence? Ans: The RBI came into existence on April 1935.
7. In which year the RBI nationalized?
Ans: The RBI was nationalized under the Reserve Bank (Transfer to public ownership) act 1948, on January 1, 1949.
8. How many members are there in the Central Board of the director of the RBI? Ans: 20
9. How many local Boards are there in the organizations structures of RBI? Ans: Four

10. Who appointed the Government of RBI? Ans: The Central Government.