MODULE_3_12_

BANKING &
INSURANCE

CERTIFICATE COURSE

DEVELOPED BY
Corp Comm Legal

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MODULE - 3

BANKING OPERATIONS

3.1. INTRODUCTION was passed as, The Banking Companies Act, 1949 and
later it was changed to Banking Regulation Act, 1949.
The banking system occupies an important place in
the economy of the country. It plays a pivotal role 3.2.1. SECTION 5 OF THE BANKING REGULATION
and acts as pillars for the development of the ACT, 1949
nation’s financial positions. The development of the
country in terms of financial powers is linked with As per Section 5(b) of the Banking Regulation Act,
the development of a proper bank in a nation. In 1949, “banking” means the accepting, for the purpose
modern nation, Banks are considered to be the of lending or investment, of deposits of money from
lenders to the person. the public, repayable on demand or otherwise.i

Banks also act as financial supporters of the people Section 5(c) of the Act defines "banking company" as
of the Country. The banking system acts as any company which transacts the business of banking
dominating in regards to financial system of the in India
country.
Explanation.--Any company which is engaged in the
3.2. LEGAL ASPECTS OF BANKING OPERATIONS manufacture of goods or carries on any trade and
which accepts deposits of money from the public
The Banking Regulations Act, 1949 is one of the merely for the purpose of financing its business as
important legal framework for the development of such manufacturer or trader shall not be deemed to
the banking institutions in India. It gives the transact the business of banking within the meaning
guidelines for the proper system of the banks. The act of this clause; and withdrawal by cheque, draft, order

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or otherwise.ii They also act as an agent for a government and local
authority. The main works of the banks are:
3.2.2. SECTION 6 OF THE BANKING REGULATIONS
ACT, 1949iii ▪ The acquisition, construction, maintenance
and alteration of any building or works
This section talks about the activities which are necessary or convenient for the purpose of
carried by the banking institutions. They are namely: the company is done by the banks.
borrowing, raising, taking up of money; the lending
money either with or without security; and drawing, ▪ Selling, improving, managing, developing,
making, accepting, discounting, buying, selling, exchanging, leasing, mortgaging, disposing of
collecting and dealing in bills of exchange, promissory or turning into account or otherwise dealing
notes, coupons, debentures, certificates, scrips and with all or any part of the property and rights
other instruments, and securities whether of the company.
transferable or negotiable or not; the granting and
issuing of letters of credit, travelers' cheques and ▪ Doing all such other things as are incidental or
circular notes; the buying, selling and dealing in conducive to the promotion or advancement
bullion and specie; the buying and selling of foreign of the business of the company
exchange including foreign bank notes; the acquiring,
holding, issuing on commission, underwriting and ▪ Any other form of business which the Central
dealing in stock, funds, shares, debentures, Government may, by notification in the
debenture stock, bonds, obligations, securities and Official Gazette, specify as a form of business
investments of all kinds; the purchasing and selling of in which it is lawful for a banking company to
bonds, scrips or other forms of securities on behalf of engage.
constituents or others; the negotiating of loan and
advances; the receiving of all kinds of bonds, scrips or 3.2.3. SECTION 8 OF THE BANKING REGULATIONS
valuables on deposit or for safe custody or otherwise; ACT, 1949iv
the providing of safe deposit vaults; the collecting and
transmitting of money and securities. No company shall directly or indirectly deal in the
buying or selling of “goods”, or any trade or sell of the
barter good otherwise than in connection with the
Bills of Exchange.

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For this purpose of this section, Goods means every Use of the word “BANK” is mandatory for the banking
kind of movable property, other than actionable institutions, and the other person cannot use this
claims, stock, shares, money or any other word.
instruments.
3.2.5. SECTION 49(A) OF THE BANKING
There are three categories of banks: REGULATIONS ACT, 1949

▪ Body Corporates under a special Law. No person, other than a banking company, the
▪ Banking Companies registered under Reserve Bank, the State Bank of India or any other
banking institution, firm or other person notified by
Companies act. the Central Government can accepts deposits,
▪ Cooperative Societies registered under withdrawable by the cheque.vi

Central or State Enactment or Cooperative 3.2.6. SECTION 51 OF THE BANKING
Societies. REGULATION ACTvii

3.2.4. SECTION 22 OF THE BANKING Certain provisions of the Banking Regulations act are
REGULATIONS ACT, 1949v also applicable to the State Bank of India, or any
corresponding new Bank, a Regional Bank or any
No company shall carry any banking business in India other Subsidiary Bank.
unless it has a license issued in behalf by the Reserve
Bank and every banking company before the There are two types of banking institutions in India:
commencement and after the commencement of six
months has to apply in writing for the issuing of the ▪ Commercial banks
license for carrying the business of banking. ▪ Co-operative bank

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3.3. BANKING SYSTEM IN INDIA
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Indian banking system has Reserve Bank of India at Rupees 5 lakhs and which satisfy RBI that their affairs
its apex. It is the central bank of the country. It has all are carried out in the interests of their depositors. All
the powers to regulate the working system of all the commercial banks- Indian and foreign, regional rural
subordinate banks of the nation and all the banks and state co-operative banks-are scheduled
subordinate banks are required to follow the banks.
guidelines of the RBI. Central bank is known as
banker’s bank. They have the authority to implement Non –scheduled banks are further classified into
monetary and credit policies. It is owned by the commercial banks and co-operative banks.
government of a nation and has the monopoly power Commercial banks are the oldest banking institutions
of issuing notes. and they consist of a bigger share in the total banking
intuitions of the country. Commercial banks are
The functions of Reserve bank are as follows: meant for profit making and for financial trade. They
charge high rate of interest from their borrowers and
▪ It is known as banker’s bank. pay less rate of interest to their depositors that
▪ It is a banker to the central and state makes profit to their banks. The example
Commercial Banks are Punjab National Bank,
governments. Allahabad Bank, Canara Bank, Andhra Bank, Bank of
▪ It issues currency. Baroda, etc.
▪ It manages the foreign exchange
The commercial banks are further divided into:
management in the country. • Public sector banks
▪ Helps in the development of the country by • Private sector banks

providing larger funds. 3.3.1. PUBLIC SECTOR BANKS

Under the Reserve bank of India act, 1934, the The Public sector banks itself denotes by its names
banking system is divided into two parts: occupies a larger amount of stake that is held by the
government. For Ex. State bank of India is a public
▪ Scheduled banks bank. The government occupies at least 50% of the
▪ Non- Scheduled banks shares in the market.
Public sector banks are further classified into:
Schedule banks are those which are mentioned in the
second schedule of the Reserve bank of India act.
Scheduled banks are those which have a paid-up
capital and of an aggregate value of not less than

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▪ Nationalized banks “The Reserve Bank shall appoint the state bank as its
▪ State bank of India and its associates. sole agent at all the places in India where it doesn’t
have an office or branch of its banking department
3.3.1.1. Nationalized banks and there is a branch of the state bank or branch of
the subsidiary banks.”viii
There are 20 nationalized banks in India. Such as
Bank of Baroda, Canara bank, Bank of India, Punjab On 1st April 2017, was the record date in India as a
National bank etc. The nationalized banks gives merger of State Bank of India took place with five
higher quality of benefits as comparison from the Associates Banks and Bhartiya Mahila Bank. The five
other banks in India because they are strong in their Associates banks are:
transaction service. They have maintain proper
balance sheets other than from the ordinary banks. 1. State Bank of Bikaner and Jaipur
They also provides a fixed exchange rates to their 2. State Bank of Mysore
customers. They have a improved technology of 3. State Bank of Travancore
issuing credit cards, cheque debit cash etc. for faster 4. State Bank of Hyderabad
transactions. Nationalized banks in India also offers 5. State Bank of Patiala
insurance services to their customers.
Nationalized banks act as way to protect the safety of 3.3.2. PRIVATE SECTOR BANKS
the savings of the public. This is the main motto of the
nationalized banks. The Private Banks are those banks which holds a
majority share capital of the bank that is held by the
3.3.1.2. State Bank of India and its Associates private individuals. The companies which are private
limited put their shares in the private banks there is
The origin of State Bank of India started in 19th no interference by the government in those kinds of
century with the establishment of the bank of banks. These banks have limited liabilities.
Calcutta in Calcutta on June 1866. The state bank of Examples of Private Sector Banks are: ICICI Bank,
India was established under the state bank of India Axis Bank, HDFC Bank etc.
act, 1955. The State Bank of India acts as an agent of
the Reserve Bank of India. It carries all the 3.3.3. SCHEDULED CO-OPERATIVE BANKS
transactions of the State.
The Co-operative banks performs basic functions of
banking systems but they are different from

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commercial banks. The co-operatives banks have ▪ Recurring Deposits
been establishes under the co-operative societies
acts, 1965 of different states. These institutions are 3.4.1. FIXED DEPOSIT ACCOUNTS
totally owned by its members. Members have a
professional community to give services like Loans, The Fixed deposit are payable on the fixed maturity
Deposits etc…These banks are costumer owned rate with the principal amount and also with the
there are mainly working for profits and then the agreed interest rate. The interest rate is fixed. They
profits are distributed among its members. The co- are also known as “Term Deposits”. The fixed
operative banks have three tier set up. The State co- deposits refers to the amount to be payable on the
operative banks is the apex institution in a state, expiry of a specified period, that is chosen by the
while central/ district co-operative banks functions depositor to enable him to get the money back
at the district level and primary credit societies work whenever he is in need.
at the village level . They are different from
commercial banks as not all the sections of the The banks gives high rates of Interest in fixed
banking regulations act are applicable to co- deposits accounts. The rates of interest on which the
operative bank. The ultimate motive of scheduled co- banks accepted fixed deposits are regulated by the
operative banks is the participation of the community Reserve Bank of India that is provided in Section 21
and the growth and benefit of the community. and 35A of the Banking Regulation Act, 1949. The
minimum period of fixed deposit is seven days as per
3.4. DEPOSIT ACCOUNTS AND HANDLING the Reserve Bank of India.
CUSTOMER COMPLAINTS
3.4.2. RECURRING DEPOSITS
Deposit accounts means which includes saving
accounts, current account or any other type of Recurring deposits is also known as Cumulative
accounts. There are various types of deposit accounts Deposit Accounts. These are introduced in recent
namely: years in the Banking System. These accounts are for
the person who doesn’t have lump sum amount to
▪ Fixed Deposit Accounts save but they are willing to deposit the amount on a
▪ Current Accounts monthly basis and the total amount is payable after
▪ Savings Accounts

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the expiry of the said period with the agreed interest The Reserve Bank of India has prohibited the banks
rate. The period of deposit is minimum of 6 months to open a saving account in the name of any trading
and maximum of 10 years. company which is proprietary or a partnership firm.
The banks should not open a savings account in the
3.4.3. CURRENT ACCOUNTS name of:

Current account are mainly for the business man, ▪ Government departments,
firms which are never used for the purpose of the ▪ Bodies depending upon budgetary allocations
savings and investment of the money. There is no
restriction on the number and the amount that the for performance of their functions,
depositor do for the transactions from the current ▪ Municipal Corporations,
account. The banker is also in no need to pay any ▪ Panchayat Samitis,
interest rate to the depositor. ▪ State housing boards,
The current account is meant for the convenience of ▪ State district level cooperative societies.
the person who does not wants to carry a big amount
of cash in their hands. The bankers some time take Complaint Management is one initiative under a
service charges on these kinds of deposits. strategy called Customer Experience Management.
By listening to customer, the companies, the banks
3.4.4. SAVINGS ACCOUNTS can develop proper service standards. A complaint is
communication that is received to the bank from its
Savings accounts is meant for the purpose of the customers through any means either by oral, written,
lower and middle class person who wants to save a mail or any other communication. The customer in
part of their incomes to their future need. The current their complaint expresses any dissatisfaction about
accounts are better than the savings account. an aspect of the bank system or service or from their
Because the banks requires the minimum balance to employee’s behavior.
be maintained in the savings accounts. They also levy
charges on the non-maintenance of the minimum A complaint may relate to:
balance. Different banks have different minimum
balance for the saving accounts. ▪ Failure to provide a service
▪ Inadequate standard of service
▪ Dissatisfaction with Council policy
▪ Treatment by or attitude of a member of staff

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▪ Disagreement with a decision where the A banker always renders a number of services to his
customer cannot use another procedure (for customer. The relationship between a banker and a
example an appeal) to resolve the matter customer is that of a creditor and a debtor. A
complaint in relation to a service may be fine if the
▪ The Council’s failure to follow the customer suffers from any deficiency from the work
appropriate administrative process. of the bank. Banking companies provide various
services to the customers. Hence if any complaint is
3.4.5. PROCEDURE FOR COMPLAINT filed against deficiency in service including banking
RESOLUTION services they can approach consumer forum.
On receipt of a complaint the District Forum may
▪ The customer can drop a complaint in the either allow the complaint to be proceeded with or
complaint box that will be placed in the main rejected with in twenty one days of the receipt of the
baking hall. complaint.
The District Forum shall need a copy of such
▪ The manager of the branch will take care of complaint to the opposite party of the case within
the complaint. thirty days. The District Forum shall have the powers
of a civil court under the Code of Civil Procedure
▪ “A complaint cell” will be established at 1908.
corporate office to receive, coordinate and
respond the customer complaints. 3.5. IMPORTANCE OF CUSTOMER SERVICE AND
CUSTOMER RIGHTS
▪ At the end of the day the manager will open
the complaint box and will check all the A banker renders various services to his customer as
complaints that are sent by the customers. well as the general public. The main function the
banker is concerned that is acceptance of the
▪ The bank manager will logged all the deposits or lending money to customer. The
complaints in the register by the end of the customer service should be genuine.
same day. Points to be remember for customer service:

▪ It is the foremost duty of the bank manager to
see that the complaints are resolved
completely to the customer’s satisfaction.

▪ The banks have adapted Business Process
Management to handle the customer
complaints.

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▪ The Teller is the face of a bank. He is the any customers on grounds of gender, age,
person who has to deal with the customer religion or any form to discriminate the
most. So they are the person who provide customer. The banks cannot offer different
services to the customers. rates of interest to the different customers.
▪ Right to transparency, fair and honest
▪ Their level of service shows the image of the dealing: the banks should make a document
bank. A polite teller can enhance the which can be understood by the customer
reputation of the bank. easily. The banks should make a contract that
is transparent and easily understood by the
▪ Loan manager are another important common people. The key fact of the contract
members of a bank who develop a big impact should be clearly disclosed. Any fact that
on the growth and the development. The cause disadvantage to the customer should
manager of the bank who provides loan helps be disclosed.
the bank to get a big business deal. ▪ Right to suitability: If the banker mis-cells the
property that has been pledged to the bank to
▪ With the increasing use of online banking, the third person he will be responsible for
banking is becoming extremely important for that contract.
banks to provide online customers who are in ▪ Right to privacy: Banks are responsible to
need. keep all the private details of the customer
confidential. Right to privacy is also
▪ People nowadays uses online services to save mentioned under the Indian Constitution Act.
their time. The helpful online customer The only way the bank can share the personal
service can provide instant help to a customer details of the customers only when the
looking for a quick solution. customer gives permission to that.
▪ Right to seek compensation: The right to
3.5.1. CUSTOMER’S RIGHTS seek compensation is the very important right
to the customers. If the bank makes anything
The Central Bank has advised the Indian Banks which is against the benefit of the customer
Association and the Banking Codes to formulate a the customer can seek compensation for that.
Model Customer Rights to the Customers.
There are following rights given to the customers:

▪ Right to fair treatment: the right prohibits
the banks from discriminating them against

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i Section 5(b), Banking Regulation Act, 1949. v Section 22, Banking Regulation Act, 1949.
ii Section 5(c), Banking Regulation Act, 1949. vi Section 49A, Banking Regulation Act, 1949.
iii Section 6, Banking Regulation Act, 1949. vii Section 51, Banking Regulation Act, 1949.
iv Section 8, Banking Regulation Act, 1949. viii Section 45 of the Reserve Bank of India Act, 1934

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