MODULE_1_12_

BANKING &
INSURANCE

CERTIFICATE COURSE

DEVELOPED BY
Corp Comm Legal

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MODULE - 1

INTRODUCTION TO BANKING

1.1. WHAT IS A BANK? public, repayable on demand or otherwise, and
withdrawal by cheque, draft, order or otherwise. A
The word “Bank” has been derived from the French banking company or simply a bank, is defined in
word “Banque” and the Italian word “Banca” and both Section 5(c) of the Act as - "banking company" means
these terms when translated to English, mean a any company which transacts the business of banking
“bench”. It is referred to a bench which is used for [in India];ii
accepting money, lending money and the exchanging
of money or coins in the market place.i Ever since currencies started to be minted, banking
institutions existed; perhaps in a more primary form.
Crowther defines a bank as, "one that collects money In ancient times, currencies used were mainly coins.
from those who have it to spare or who are saving it These coins varied in sizes and shapes which were
out of their income and lends the money so collected attributed to different values. The merchant class
to those who require it". emerged because coins were easy to hoard and there
was an increasing need for credit that was to be
Dr. L. Hart, says that the bankers are "one who in the granted to the needy people. These merchants
ordinary course of business; honours cheques drawn advanced credit and charged a certain amount of
upon him by persons from and for whom he receives interest on the loans that they granted. The ancient
money on current accounts". Hindu scriptures of the Vedic period also provide
references to money lending activities which are very
A Bank is a financial institution which performs the similar to that of a bank. The Vedic period was
functions of accepting deposits and advancing credit. followed by the Smriti period and during this time,
The banking system is highly regulated in most banking was carried on by the Vaishyas, who are a
countries. The banking function is explained in part of the third category of people in the Ancient
Section 5(b) of the Banking Regulations Act, 1949 as Varna System. Manu, the author of Manusmriti,
- "banking" means the accepting, for the purpose of
lending or investment, of deposits of money from the

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which is an ancient legal text, describes the earning of as was renamed as Imperial Bank of India. Post-
interest as “the business of Vaishyas”. The functions independence, in the year 1955, it was taken over by
that were performed by the banker in the Smriti the Government of India and renamed as State Bank
period were accepting deposits, granting secured and of India. Bank of Upper India was established in 1863
unsecured loans, acting as a bailee, granting of loan to but it failed in its functions in the year 1913 after
the King when the need arose or when situations which some of its assets and liabilities were
gave rise to a sort of economic crisis. transferred to Alliance Bank of Shimla. Punjab
National Bank was established in 1894 and is still in
Metallic money was in use during the Mughal period. existence. There were a few banks like the
Indigenous bankers played a very vital role by lending Corporation Bank, Indian Bank, Bank of Baroda,
credit and financing trade and commerce of the which established during the period of the Swadeshi
people belonging to the business class. Movement (1906-1911) when local businessmen and
political icons wanted to establish banks solely for the
With time, as the system of banking gained more Indian community. The Reserve Bank of India was
importance, it became more formalized. It is established in 1935 by the Reserve Bank of India Act.
important to note that the Dakshina Kannada district Another important reason for its establishment was
in Karnataka is known as the “Cradle of Indian the recommendations of the Royal Commission on
Banking”. This is because seven of India's leading Indian Currency and Finance, also known as the
banks, Syndicate Bank, Canara Bank, Corporation Hilton-Young Commission.
Bank, Karnataka Bank, Vijaya Bank, Vysya Bank and
the State Bank of Mysore originated from this state. The Banking Regulations Act was passed in the year
The banking system in India can be traced back to the 1949. This Act provided a frame work for the banking
late 1700’s. Bank of Hindustan, Calcutta (now system in the country, how it needs to be regulated
Kolkata) was the first joint stock bank to be and also supervision of commercial banking activity.
established in the year 1770. State Bank of India is This regulation brought the Reserve Bank of India,
the oldest bank which is still in existence. It was the Apex Bank under the control of the Government.
known as Bank of Bengal when it originated in 1806. It was through this Act that a wide range of powers
Two other banks, namely, Bank of Bombay and Bank were vested with the RBI for the supervision and
of Madras which were also known as the Presidency control of banks. The act also vested licensing powers
Banks, merged with this bank to create a single entity and the authority to conduct inspections. A report in

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the year 1951 by the committee of direction of All transactions involve a substantial amount of
India Rural Credit Survey, resulted in the first step paperwork in order for the farmers to obtain credit
being taken toward the nationalization of banks in for their agricultural or agro-based activities. It is a
India. The report recommended a strong integrated difficult task for a farmer to obtain and produce the
state owned commercial banking institution which required documents and satisfy the bank officials to
will aid in the development of banking in general. In grant him a loan. Therefore, credit from banks gets
the year 1959, banks that were formerly owned by delayed due to this process of documentation.
princely states were made subsidiaries of State Bank
of India. In the year 1960, Reserve Bank of India Nationalisation in the years 1969 and 1980 was a
forced the merger of weak banks with the strong ones structural change that transformed the entire system
which in turn reduced the total number of banks in of banking in India and it was a necessary move to
the country. In the same year, the State Bank of India serve the needs of the developing economy. The
was given control of eight state-associated banks. Government issued an ordinance Banking
This was facilitated through the State Bank of India Companies (Acquisition and Transfer of
(Subsidiary Banks) Act, 1959. iii Undertakings) Ordinance, 1969 which nationalised
the 14 largest commercial banks which were Central
1.2. BANKING STRUCTURE IN INDIA Bank of India, Bank of India, Punjab National Bank,
Bank of Baroda, United Commercial Bank, Canara
An indigenous banking system as it existed before Bank, United Bank of India, Dena Bank, Syndicate
banking was formalized, had many drawbacks to it. It Bank, Union Bank of India, Allahabad Bank, Indian
was largely unorganized, there was no distinction Bank, Bank of Maharashtra, Indian Overseas Bank.
made between loans which were short-term and with effect from the midnight of 19 July 1969. The
long-term. The purposes of loans were also reason for nationalisation was to give the
undistinguished. The methods of account keeping government more control of credit delivery.
were very informal. The interest charged on the loans Subsequently, stakes of the government were
is very high and unacceptable. This imperfect and reduced and could only be up to 51 per cent in public
exploitative credit market still exists in most of the sector banks. Opportunities were given for new
rural parts of India due to the non-availability of loans private sector banks to establish themselves and
from institutional sources. Commercial and Regional foreign banks were permitted to have additional
Rural Banks have been criticised because branches.The structure of the banking system differs

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from one country to another and is usually a Finance. It is the central bank of the country under
consequence of the regulatory policies of the money which banks are classified as commercial banks that
market that the country adopts. The banking system include public sector and private sector banks,
in India comprises of a large number of commercial foreign banks and local area banks. It also includes
and cooperative banks, specialized developmental regional rural banks and cooperative banks. Thus, RBI
banks for the purposes of development and credit aims at promoting financial and economical stability
facilitation in the sectors of industry, agriculture, in the country. It supervises, controls and regulates
social security institutions, external trade, housing, the activities of all financial institutions of the
collective investments, etc. The banking system is the country. Its main function is to control, regulate and
backbone of the financial system or the economy of a stabilize the monetary system of the country in the
country at large. best of the national interest.

1.2.1. RESERVE BANK OF INDIA 1.2.2. COMMERCIAL BANKS

It is at the apex in the hierarchy of banking Banks which carry out and perform all kinds of
institutions in India. It was established on 1st April, banking activities and generally, finance trade and
1935 as per the RBI Act,1934 as a private commerce are called commercial banks. Since they
shareholders’ bank with the share capital of Rs. 5 hold deposits for a short period, these banks normally
Crores. It was nationalised after independence in the advance short-term loans to businessmen and
year 1949. RBI plays a vital role in the development traders. Recently it has been observed that
strategy of the Government of India. It is managed commercial banks have extended their areas of
and controlled by a Central Board of Directors which operation to medium-term and long-term finance.
consists of 20 members. There is a governor and four These banks are playing a very useful role in the
Deputy Governors who are appointed by the development of trade, commerce and industry. They
Government of India for a period of five years. There have become indispensable to the economic
are four Directors who are nominated by the Central development of a country. They create credit,
Government, one each from the four Local Boards at mobilize savings and provide funds to business.
Chennai, Delhi, Kolkata and Mumbai. There are ten
Directors nominated from various fields of expertise Under the RBI Act, 1934, commercial banks in India
and one Director is nominated from the Ministry of are divided into two types.

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▪ Scheduled Commercial Banks: Are those IndusInd, Kotak Mahindra are a few
banks which are included in the Second examples.
Schedule of the RBI Act, 1934 and whose
paid-up capital and reserve fund is Rs. 5 Lakhs 1.2.3. FOREIGN BANKS
and above.
Banks that are registered as companies and have
▪ Non-Scheduled Banks: Are those banks which their headquarters in a foreign country but operate
are not included in the Second Schedule of the through their branches in India are known as Foreign
RBI act, 1934. Banks with a reserve capital of Banks. There are 30 foreign banks operating in India
less than Rs. 5 lakhs are termed as non- at present.iv India issues a single class of banking
scheduled banks. Unlike scheduled banks, licence to banks. It does not place any undue
they are not entitled to borrow from the RBI restrictions on their operations merely on the ground
for normal banking purposes, except, in that in some countries there are requirements of
emergency or “abnormal circumstances.” multiple licences for dealing in local currency and
foreign currencies with different categories of
On the basis of ownership, commercial banks are also clientele.v In order to operate in India, the foreign
classified into two categories- banks have to obtain a license from the Reserve Bank
of India. For granting this license, the following
▪ Public Sector Banks: Are those banks which factors are considered:
are owned and managed by the Government
and also in which the majority of stake is held ▪ Financial soundness of the bank.
by the Government. Allahabad Bank, Andhra ▪ International and home country rating.
Bank, Canara Bank, Oriental Bank of ▪ Economic and political relations between
Commerce, Syndicate Bank, Vijaya Bank are a
few examples. home country and India.
▪ The bank should be under consolidated
▪ Private Sector Banks: Are those banks which
are owned and managed by private supervision of the home country regulator.
individuals or companies. These banks are ▪ The minimum capital requirement is US $ 25
registered as companies and the liabilities
that they have are limited. They include million spread over three branches - $ 10
foreign banks as well. Axis Bank, HDFC, IDFC, million each for the first and second branch
and $5 million for the third branch.

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▪ Both branches and ATMs require licenses and
these are given by the RBI in conformity with
WTO’s commitments.vi

1.2.4. REGIONAL RURAL BANKS 1.3. ROLE OF THE RBI

These banks provide credit to the weaker sections of Functions of RBI
society living in the rural areas where the economy is
largely informal. Credit is provided to farmers, Traditional Functions Developmental Other Functions
agricultural labourers, and small entrepreneurs. Functions
NABARD (National Bank for Agriculture and Rural Monopoly of note Research
Development) refinances and imposes certain issue Agricultural functions
conditions for delivery and recovery of credit upon finance Special
these banks. Banker to the functions
government Industrial
1.2.5. CO-OPERATIVE BANKS Finance
Banker's bank
These banks have been in existence since a long
period of time. They operate on the principle of co- Lender of last resort
operation and mutual help and perform functions in Clearing house
urban and rural areas alike. These banks are set up Leader of money market
and regulated by the various Co-operative Societies
Acts that are passed by the State Governments. The Controller of Credit
Banking Regulation Act, 1949 also applies to these
banks. Cooperative banks function on the basis of “no Custodian of foreign exchange
profit, no loss”. They have a three-tier structure.
Andhra Pradesh State Co-operative Bank Ltd,
Gujarat State Co-operative Bank Ltd are examples.

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The Reserve bank of India performs several agent of the government in respect of the country’s
functions, including traditional as well as relations with international institutions like the
developmental and other functions. International Monetary Fund and the World Bank. It
gives useful advice to the government on important
1.3.1. TRADITIONAL FUNCTIONS economic matters, such as foreign exchange policy,
monetary policy, planning and budgetary policy etc. It
1.3.1.1. Monopoly of note issue also performs the task of managing public debt.

The RBI has the sole right to issue of currency notes 1.3.1.3. Banker’s Bank
of all denominations in the country.vii The RBI has
been following a minimum reserve system while The activities of all commercial banks are controlled
issuing currency notes. This means that the RBI needs and managed by the RBI. The regulation of banks may
to maintain a reserve of gold, silver and foreign be related to their licensing, branch expansions,
exchange against issue of currency notes. It has to liquidity of assets etc. Every commercial bank has to
maintain a minimum reserve of Rs. 200 Crores of maintain a certain portion of its total deposits in the
which at least Rs. 115 Crores has to be in the form of form of cash reserve with the RBI. The cash reserves
gold and the remaining Rs. 85 Crores in government that the RBI holds of the commercial banks, help the
securities or foreign exchange. It is important to note commercial banks in times of financial difficulty. The
that it is not the RBI that issues coins but the Ministry RBI also gives credit to the commercial banks by
of Finance that does it. It issues currency notes of Re. discounting of bills and advancing money on various
1 and coins of all denominations. securities.

1.3.1.2. Banker to the Government 1.3.1.4. Lender of Last Resort

The RBI acts as a banker, agent and advisor to the the RBI helps the commercial banks in times of their
government. The RBI performs the same functions as financial crisis. When commercial banks are not able
the commercial banks perform to their customers, to get financial assistance from any other source, RBI
such as receive deposits from the government and comes to their rescue. A commercial bank can
advances loans to it when it is in need. It receives and approach the RBI for loans. The RBI lends money to
makes all payments on behalf of the government. It the commercial banks against the rediscounting of
transfers government funds from one place to the bills of exchange or government securities. This
another, from one account to another. RBI acts as an

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role of the Central Bank saves the commercial banks various economic variables such as prices, interest
from being bankrupt. Thus, the RBI plays the role of rates etc. in the economy.
guarantor for the commercial banks and maintains a
sound and healthy banking system in the economy. 1.3.1.8. Custodian of Foreign Exchange

1.3.1.5. Clearing House the RBI acts as a custodian of foreign exchange
reserves. It is required to maintain reserves like gold,
The RBI acts as a “clearing house” for transfer and silver and foreign exchange to back the issue of
settlement of mutual claims of the commercial banks. currency notes and to meet international payments.
As it keeps the cash reserves of all commercial banks, It has to maintain exchange rates and enforce
it is easy for commercial banks to settle each other’s exchange control and restrictions imposed by the
debts or transfer funds from one bank to another government in order to economise the use of foreign
through the RBI. Thus, the inter-bank indebtedness exchange and maintain external stability. The RBI has
can be easily settled without using cash. a separate Exchange Control Department to
supervise and control foreign exchange reserves.
1.3.1.6. Leader of Money Market
1.3.2. DEVELOPMENTAL FUNCTIONS
The RBI is the leader of the money market in the
country. It controls the activities of different In addition to the traditional functions, the RBI
components of the money market such as commercial performs some developmental functions such as
banks, financial institutions etc.
1.3.2.1. Agricultural Finance
1.3.1.7. Controller of Credit
The RBI has been extending advice and financial
One of the important functions of the RBI is the assistance to the co-operative credit institutions for
control of credit. It is necessary that the supply of the the development of agriculture. For this purpose, it
credit and the use of credit should be in an has set up an Agricultural Credit Department and
appropriate amount and direction. For this purpose, separate funds for providing medium and long-term
it uses various credit control measures such as bank finance. The functions of this department and those
rates, open market operation, variable reserve ratio of the funds have been passed on to the National
and selective credit controls. By controlling the Bank for Agriculture and Rural Development.
supply of money and credit, the RBI controls the

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1.3.2.2. Industrial Finance 1.4. ROLE OF COMMERCIAL BANKS

The RBI provides credit facilities to both, small-scale Commercial banks play an important role in the
and large-scale industries through State Finance economic life of a country. These banks perform a
Corporations (SFCs), IFCI, IDBI, ICICI etc. It also variety of functions and help the businessmen and
established the National Industrial Credit Fund in the traders. Modern commercial banks perform
1964 to provide financial assistance to large-scale mainly two types of functions; Primary Functions and
industries. Secondary Functions.

1.3.3. OTHER FUNCTIONS 1.4.1. PRIMARY FUNCTIONS
1.3.3.1. Research Functions 1.4.1.1. Accepting Deposits

The RBI collects and publishes information relating to It is the most important function of commercial
agricultural, industrial, financial sectors of the banks. They accept several types of deposits from the
economy, exports and imports, banking, trends in the public, they are as discussed below:
money and capital markets, price trends etc. On the
basis pf these information, the government can ▪ Current Account Deposits: These accounts
formulate and implement its economic and monetary are opened by persons who belong to groups
policies. It also issues special bulletins, journals and earning high income, like industrialists,
various research papers. businessmen, trusts, partnership firms,
companies, educational institutions, etc.
1.3.3.2. Special Functions These deposits are payable on demand or
money can be withdrawn without any notice.
The RBI conducts special debates and seminars on Money from these accounts can be
various subjects. It also provides training facilities to withdrawn any number of times as desired by
bank staff. It maintains regular contacts with the depositors. Normally, no interest is paid
international financial institutions. It also suggests on these deposits. The customers are issued a
remedies for the problems of poverty, cheque book. Current deposits are also
unemployment, inflation, deflation etc. known as demand deposits.

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▪ Savings Account Deposits: People with low interest. Fixed deposits are also called time
income, salary earners etc generally open deposits.
these accounts. Any individual/resident with ▪ Recurring Deposits: Banks encourage
proper identity through the introduction of customers to opt for recurring deposits for a
one of the customers of the bank can open specific period of time by accepting a fixed
and operate savings bank account with or sum of money every month. Money in these
without cheque book. Certain restrictions are accounts is deposited in monthly instalments
imposed on these accounts regarding the for a period of one year or more. After the
number of withdrawals and maintaining completion of the last instalment, the total
minimum and maximum balance. Money amount accumulated is paid to the depositor,
deposited in the account can be withdrawn along with the interest. The rate of interest on
either once or twice a week. Rate of interest these deposits is nearly the same as on fixed
paid on these deposits is low as compared to deposits.
that on fixed deposits. This type of account
encourages and mobilizes small savings in the 1.4.1.2. Advancing of Loans
country.
Another important function of commercial banks is to
▪ Fixed Deposits: Money in these accounts is advance loans to the public. After keeping certain
deposited for a fixed period of time and portions of cash reserves, the banks lend remaining
cannot be withdrawn before the maturity of portion of deposits to the needy borrowers. The
that period. If the deposit holder needs the various types of loans and advances are as follows:
money before the expiry of the stipulated
period, he may be allowed to withdraw 80 to ▪ Overdraft: It is a facility provided by a bank to
85% of the deposit amount as loan at a high its current account holders. The bank allows
rate of interest. The rate of interest paid on such customers to over draw their accounts
these deposits is higher than that on other up to a certain limit. Interest is charged on the
deposits. The rates of interest depend upon amount actually overdrawn by the customer.
the period for which money is deposited. The This facility is generally available to business
longer the period, the higher is the rate of firms and companies.

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▪ Cash Credit: It is a type of loan which is given amount of interest (discount charge) charged
to the borrower against the current assets, by the bank for lending the money.
such as shares, stocks, bonds, etc. The bank
opens the account in the name of the 1.4.2. SECONDARY FUNCTIONS
borrowers and allows him to withdraw the
money from time to time up to a certain limit Commercial banks also perform certain other
as determined by the value of his current functions. These are called secondary functions. They
assets. Interest is charged only on the amount are mainly of two types:
actually withdrawn from the account.
1.4.2.1. Agency Services
▪ Loans: Loan is a financial arrangement in
which credit is provided by a commercial bank Commercial banks perform certain agency services
through opening a separate account, called for and on behalf of their customer. They are:
loan account. In this method, the bank gives a
specified sum of money to a person or a firm ▪ Remittance of funds: Banks helps their
against collateral security. The loan amount is customer in transferring funds from one place
credited to the account of the borrower and to another through drafts, cheques, etc.
the borrower can withdraw money from the
account according to his requirements. But ▪ Buying and selling of securities: Banks
the interest is charged on the entire amount undertake buying and selling of various
sanctioned by the bank. securities like shares, stocks, bonds,
debentured etc. behalf of their customers.
▪ Discounting of Bills of Exchange: This is
another type of lending by the modern banks. ▪ Making of payments: Commercial banks help
Discounting the bills of exchange means their customers by making payments of their
encashing the bills of exchange from the electrical bills, insurance premium, tax, etc.
banks before the date of maturity. The bank
deducts a certain amount of discount from 1.4.2.2. General Utility Services
the face value of the bill and pays the balance
to the person discounting the bill. The In addition to agency services, the commercial banks
discount deducted by the bank is actually the provide many general utility services such as

▪ Locker facility: Banks provide locker facility
to their customers. The customers can keep
their valuables like gold and silver ornaments

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and important documents in these lockers. Credit creation by commercial banks: Creation of
Some annual rent is charged by the banks for credit is one of the most important functions of
these services. commercial banks. According to R.S. Sayers, “Banks
▪ Issue of traveller’s cheques: Commercial are not merely purveyors of money, but also
banks issue traveller’s cheques to their manufacturers of money”. Bank credit means bank
customers to carry money safely while loans and advances. A bank keeps a certain
traveling within a country or abroad. Thus, proportion of its deposits as minimum reserve for
the customers can travel without fear of theft meeting the demand of the depositors and lends out
or loss of money. This is no longer in use as the remaining reserve to earn income. The bank loan
times have changed and with improves is not paid directly to the borrower but is only
technology, people now use credit cards and credited to his account and allows him to withdraw
debit cards and other methods of digital the required amount. Every bank loan creates an
money. equivalent deposit in the bank. In this way, the bank
▪ ATM and Credit card facility: The banks creates credit. Thus, credit creation means expansion
today, have Automated Teller Machine (ATM) of deposits.
facility. Under this system, the customers can
withdraw their money from ATM counters In the words of Prof. N.T. Newlyn, “Credit creation
easily and quickly throughout the day as these refers to the power of commercial banks to expand
ATM’s are open 24/7. Banks have introduced secondary deposits through investment in
credit cards. A Credit card is an instrument securities.”
which can be used to purchase goods and
services without paying immediate cash. Bank deposits arise in two ways: Primary deposits
and Secondary or Derivative deposits.
Besides, the commercial banks have started to
perform a number of other functions in recent years, ▪ Primary Deposits: When a bank accepts cash
such as e-banking, merchant banking, mutual funds, from the customer and opens a deposit
advances to priority sector like agriculture, small account in his name, it is called primary
scale industries, retail trade, small business, self- deposit. The creation of primary deposit does
employment, consumption loans, educational loans, not mean credit creation. These deposits
housing loans etc. simply convert currency money into deposit
money.

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▪ Derivative Deposits: Deposits also arise To explain the process of credit creation, we make the
when customers are granted loans and following assumptions.
advances by a bank, such deposits are called
derivative deposits. When a bank grants a ▪ There are several banks, say A, B, C, etc
loan to its customer, it does not actually pay ▪ Every bank has to keep 10% of cash reserve
cash to him but simply credit to the ▪ A new deposit of Rs. 1000 has made by a
customer’s account. Thus, whenever a loan is
granted, a derivative deposit is created by the customer in bank ‘A’
bank. ▪ The people have banking habits
▪ The loan amount drawn by the customer of
Therefore, credit creation is nothing but an
expansion of bank deposits through the process of the first bank is deposited in full in the second
loans and advances as well as investments. Central bank, and that of the second bank in the third
Bank is the first source of money supply in the form of bank and so on.
currency in circulation. The RBI is the note issuing
authority of the country. The RBI ensures availability Given these assumptions, suppose, Bank ‘A’
of currency to meet the transaction needs of the receives cash deposits of Rs. 1000 from a
economy. The commercial banks are the second customer. Given the reserve ratio of 10%, the
sources of money supply. The money that commercial bank keeps Rs. 100 (10% of 1000) in reserves and
banks supply is called credit money. lends Rs. 900 to Mr. X. The balance sheet of Bank
‘A’ is as follows:
1.5. PROCESS OF CREDIT CREATION
Liabilities Assets
The process of credit creation begins with banks Deposits: Cash Reserve:
lending money out of primary deposits. Banks cannot Rs. 1000 Rs. 100
lend the entire primary deposits as they are required Loan to Mr. X
to maintain a certain proportion of primary deposits Total: Rs. 900
in the form of reserves with RBI. After maintaining Rs. 1000 Total:
the required reserves, the bank can lend the Rs. 1000
remaining portion of primary deposits. Here, banks
lend money and the process of credit creation starts.

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When Rs. 900 is lent by Bank ‘A’ to Mr. X, who either Thus, the process will continue till the cash deposit of
Rs. 1000 is completely used. The cash deposit of Rs.
deposits it with the same bank or a different bank. 1000 led to a loan deposit of Rs. 900 + 810 + 729 and
so on. Now, the total deposits of all the banks shall be
Suppose, the loan of Rs. 900 is deposited by Mr. X in Rs. 10,000.

Bank ‘B’. Bank ‘B’ starts with a deposit of Rs. 900, Thus, the credit created by the whole banking
system is as shown in the following table:
keeps 10% of it or Rs. 90 as cash reserve and lends Rs.
Multiple credit creation or Deposits multiples.
810 to Mr. Y. Then, the balance sheet of Bank ‘B’ is as (Amount in Rs.)

follows:

Liabilities Assets

Deposits: Cash Reserve: Banks Liabilities Cash New
Rs. 900 Rs. 90 Bank A
Loan to Mr. Y reserve loan
Total: Rs. 810
Rs. 900 Total: (Assets)
Rs. 900
1000 100 900

Bank B 900 90 810

This loan of Rs. 810 is deposited by Mr. Y in bank ‘C’. Bank C 810 81 729
Bank ‘C’ keeps 10% or Rs. 81 of Rs. 810 as cash
reserves and lends Rs. 729 to Mr. Z. Then, the balance All 7290 729 6561
sheet of Bank ‘C’ is as follows: other 1000 9000
banks
Liabilities Assets Total 10000
Deposits: Cash reserve: for the
Rs. 810 Rs. 81 whole
Loan to Mr. Z banking
Total: Rs. 729 system
Rs. 810 Total:
Rs. 810

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i “Banking: The Evolution, Growth and Origin”, iv “Foreign Banks”, accessed on January 8, 2018,
http://www.yourarticlelibrary.com/banking/banking-the- http://financialservices.gov.in/banking-divisions/Foreign-
evolution-origin-and-growth-of-banking/10998 Banks.

ii Banking Regulations Act, 1949. v “RBI Publications”, accessed on January 8, 2018,
https://rbi.org.in/Scripts/PublicationsView.aspx?id=9795
iii “History of Banking in India”, accessed January 7, 2018,
https://gradeup.co/history-of-banking-in-india-i-e02deb86- vi “Banking and Insurance”, accessed on January 8, 2018,
f4ac-11e5-b410-2f0cca4d3c07. https://sol.du.ac.in/mod/book/view.php?id=1225&chapterid=8
56

vii Section 22, Reserve Bank of India Act, 1934.

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