Notes on Banking | Business Services | CBSE Class 11 Business Studies

Banking: Banking is a business activity which involves accepting deposits and

lending money in order to earn profit.

Types of Banks:

1. Central Bank: Central bank is an apex bank of a country which supervises,

controls and regulates the activities of all commercial banks. Reserve Bank

of India (RBI) is the central bank of India.

2. Commercial Banks: Commercial banks are institutions which accept

deposits from the public with an aim of lending and investment.

a. Public sector banks-banks in which majority stake is held by the

government. Eg. SBI, UBI, PNB, Canara Bank etc.

b. Private sector banks-banks in which majority stake is held by private

individuals and corporations. Eg. Axis Bank, ICICI Bank, HDFC Bank

3. Cooperative Banks: Cooperative banks are aimed at providing cheap credit

to their members.

4. Specialised Banks: Specialised banks are set up for meeting some specific

needs. For example EXIM Banks provide financial help for promoting

foreign trade.

Functions of Commercial banks:

1. ​Acceptance of deposits​: One of the primary functions of a bank is to

accept deposits. Deposits are the basis of the loan operations.

These deposits are generally taken through current account, savings

account and fixed deposits.

2. Lending of funds​: Second major activity of commercial banks is to provide

loans and advances out of the money received through deposits. These

advances can be made in the form of overdrafts, cash credits, discounting

trade bills, term loans, consumer credits and other miscellaneous advances.

3. Cheque facility: A cheque is a credit instrument which helps in withdrawing

money from the banks. It is the most convenient and an inexpensive

medium of exchange.

4. Remittance of funds:​ Another function of commercial banks is of providing

the facility of fund transfer from one account to another. The transfer of

funds is administered by using bank drafts, pay orders or mail transfers, on

nominal commission charges.

5. Allied Services​: In addition to above functions, banks also provide allied

services such as bill payments, locker facilities, underwriting services. They

also perform other services like buying and selling of shares and debentures

on instructions and other personal services like payment of insurance

premium, collection of dividend etc.

Note: Banks are both borrowers and lenders of money. As borrowers they pay

interest and as lenders they grant loans and get interest.

Types of Deposits/Bank Accounts:

1. Saving Account: Savings accounts are aimed at encouraging savings habit among the investors. Interest is paid at nominal rate on these deposits. Withdrawal from these accounts has some restrictions in relation to the amount as well as number of times in a given period.

2. Fixed Account: Under this account, money is deposited for a fixed period of time. They offer a higher rate of interest as compared to the savings accounts. A premature withdrawal is permissible with a percentage of interest being forfeited.

3. Recurring Account: Under this account, money is required to be deposited at regular intervals. On expiry of a fixed time period, the whole amount along with the interest becomes repayable. Recurring deposits offer a higher rate of interest as compared to saving deposits.

4. Current account: In current account, money can be deposited or withdrawn any number of times as and when required.  This type of account is generally opened by businessmen as they have numerous daily transactions. No interest is paid on current accounts. Rather, the bank may charge some service charges.

5. Multi Option Deposit Account: This type of account is a combination of saving account and fixed account. Under this facility, deposit in excess of a specified limit is automatically transferred from saving account to fixed deposit account. At the same time, if the balance in saving account is insufficient for making payments, the required funds are automatically transferred from fixed deposit to saving deposit. It provides benefits of liquidity as well as higher interest rate.

Banking Services

Bank Draft:

• It is an instrument used to transfer funds.
• Anybody can obtain a bank draft after depositing amount in the bank.
• It is drawn by a bank branch on another branch or some other bank.
• Banks charge commission for issuing bank draft.
• The payee can collect the amount by presenting the draft to the drawee branch of the bank.

Bank Overdraft:

•  Bank overdraft is a facility provided by banks to its customers to overdraw from their current accounts.
• It involves lending money for a short term.
• Bank allows the customer to withdraw more than the balance in his/her account.
• Interest is charged on the bank overdraft.
• The overdrawn limit for a customer is determined by the bank on the basis of various factors.

Cash Credit:

• Cash credit is a short term cash loan given against some security.
• Withdrawals can be made any number of times, but upto the limit specified.
• Interest is charged on the money withdrawn.

E-Banking

E-Banking: E-Banking means conduct of banking activities electronically.

Electronic services offered by banks include:

 ATM (Automated Teller Machine)

 EDI (Electronic Data Interchange)

 Credit Cards

 Debit Cards

 Point of Sales

Benefits of E-Banking:

I. To Customers

a. It provides convenience to the customers by offering 24 hours banking

services. Customers can transact from home or from office or while

travelling.

b. It develops a sense of financial discipline by keeping record of every

transaction.

c. It provides greater security to the customers as they can avoid travelling

with cash.

d. It provides customer satisfaction by offering unlimited access to the bank.

II. To Banks

a. It helps in reducing the load of the branches by keeping a centralized

database.

b. It provides competitive advantage to the banks.

c. It facilitates unlimited network to the bank.

Types of Digital Payments:

1. Plastic Cards (Debit Card and Credit Card):

a. Debit Card: A debit card is a card that allows the cardholder to transfer

money electronically from their bank a/c when making any kind of

payment.

b. Credit Card: Credit Card allows consumers to borrow money from the

bank upto certain limit in order to pay bills, purchase items or withdraw

cash.

2. Point of Sale: Point of Sale refers to the place where a customer executes

the payment for goods or services.

3. AEPS (Aadhaar Enabled Payment System): AEPS is a system which enables

a customer to carry out basic banking transactions using the Adhaar

authentication.

4. UPI(Unified Payment Interface): UPI is an instant real time payment system

developed by National Payments Corporation of India (NPCI). It facilitates

interbank transactions.

5. Micro ATM: Micro ATM is a mini version of ATM. It is a device used by

businesses to deliver basic banking services. It contains card swipe facility.

6. BHIM( Bharat Interface for Money): BHIM is an Indian mobile payment app

developed by NPCI (National Payments Corporation of India).

7. Mobile Wallets: A mobile wallet is a virtual wallet that stores payment card

information on a mobile device. Examples include Paytm, PayPal, Android

Pay, Samsung Pay etc.

8. Prepaid Cards: Prepaid card is a card in which you can spend the money

upto the amount loaded onto the card.

RTGS (Real Time Gross Settlement): RTGS is an electronic system of fund

transfer where funds are transferred from one bank to another on real time

and on gross settlement basis.

 Real time settlement means transactions are settled as soon as they

are processed.

 Gross settlement means the transaction is settled on one to one

basis.

 The minimum amount which can be transferred using RTGS is Rs 2

lakhs.

NEFT (National Electronic Funds Transfer): NEFT is an electronic system of

fund transfer from one bank account to another.

 Transfers are settled in half hourly batches every day between 12.30

am to 12 am.

 It takes around 30 minutes to complete the transfer of funds.

 NEFT is available 24X7, and 365 days.

 There is no minimum or maximum limit on amount of transaction.