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MODULE 3
BANKING OPERATIONS

3.1. INTRODUCTION
The banking system occupies an important place in the economy of the country. It plays a pivotal
role and acts as pillars for the development of the nation’s financial positions. The development
of the country in terms of financial powers is linked with the development of a proper bank in a
nation. In modern nation, Banks are considered to be the lenders to the person.
Banks also act as financial supporters of the people of the Country. The banking system acts as
dominating in regards to financial system of the country.
3.2. LEGAL ASPECTS OF BANKING OPERATIONS
The Banking Regulations Act, 1949 is one of the important legal framework for the development
of the banking institutions in India. It gives the guidelines for the proper system of the banks.
The act was passed as, The Banking Companies Act, 1949 and later it was changed to Banking
Regulation Act, 1949.
3.2.1. SECTION 5 OF THE BANKING REGULATION ACT, 1949
As per Section 5(b) of the Banking Regulation Act, 1949, “banking” means the accepting, for the
purpose of lending or investment, of deposits of money from the public, repayable on demand or
otherwise.1
Section 5(c) of the Act defines "banking company" as any company which transacts the business
of banking in India
Explanation.--Any company which is engaged in the manufacture of goods or carries on any
trade and which accepts deposits of money from the public merely for the purpose of financing

1 Section 5(b), Banking Regulation Act, 1949.

its business as such manufacturer or trader shall not be deemed to transact the business of
banking within the meaning of this clause; and withdrawal by cheque, draft, order or otherwise.2

3.2.2. SECTION 6 OF THE BANKING REGULATIONS ACT, 19493

This section talks about the activities which are carried by the banking institutions. They are
namely: borrowing, raising, taking up of money; the lending money either with or without
security; and drawing, making, accepting, discounting, buying, selling, collecting and dealing in
bills of exchange, promissory notes, coupons, debentures, certificates, scrips and other
instruments, and securities whether transferable or negotiable or not; the granting and issuing of
letters of credit, travelers' cheques and circular notes; the buying, selling and dealing in bullion
and specie; the buying and selling of foreign exchange including foreign bank notes; the
acquiring, holding, issuing on commission, underwriting and dealing in stock, funds, shares,
debentures, debenture stock, bonds, obligations, securities and investments of all kinds; the
purchasing and selling of bonds, scrips or other forms of securities on behalf of constituents or
others; the negotiating of loan and advances; the receiving of all kinds of bonds, scrips or
valuables on deposit or for safe custody or otherwise; the providing of safe deposit vaults; the
collecting and transmitting of money and securities.

They also act as an agent for a government and local authority. The main works of the banks are:

§ The acquisition, construction, maintenance and alteration of any building or works
necessary or convenient for the purpose of the company is done by the banks.

§ Selling, improving, managing, developing, exchanging, leasing, mortgaging, disposing
of or turning into account or otherwise dealing with all or any part of the property and
rights of the company.

§ Doing all such other things as are incidental or conducive to the promotion or
advancement of the business of the company

2 Section 5(c), Banking Regulation Act, 1949.
3 Section 6, Banking Regulation Act, 1949.

§ Any other form of business which the Central Government may, by notification in the
Official Gazette, specify as a form of business in which it is lawful for a banking
company to engage.

3.2.3. SECTION 8 OF THE BANKING REGULATIONS ACT, 19494

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.

For this purpose of this section, Goods means every kind of movable property, other than
actionable claims, stock, shares, money or any other instruments.

There are three categories of banks:

§ Body Corporates under a special Law.
§ Banking Companies registered under Companies act.
§ Cooperative Societies registered under Central or State Enactment or Cooperative

Societies.

3.2.4. SECTION 22 OF THE BANKING REGULATIONS ACT, 19495

No company shall carry any banking business in India unless it has a license issued in behalf by
the Reserve Bank and every banking company before the commencement and after the
commencement of six months has to apply in writing for the issuing of the license for carrying
the business of banking.

Use of the word “BANK” is mandatory for the banking institutions, and the other person cannot
use this word.

3.2.5. SECTION 49(A) OF THE BANKING REGULATIONS ACT, 1949

4 Section 8, Banking Regulation Act, 1949.
5 Section 22, Banking Regulation Act, 1949.

No person, other than a banking company, the Reserve Bank, the State Bank of India or any
other banking institution, firm or other person notified by the Central Government can accepts
deposits, withdrawable by the cheque.6
3.2.6. SECTION 51 OF THE BANKING REGULATION ACT7
Certain provisions of the Banking Regulations act are also applicable to the State Bank of India,
or any corresponding new Bank, a Regional Bank or any other Subsidiary Bank.
There are two types of banking institutions in India:

§ Commercial banks
§ Co-operative banks
3.3. BANKING SYSTEM IN INDIA

6 Section 49A, Banking Regulation Act, 1949.
7 Section 51, Banking Regulation Act, 1949.

The Indian banking system has Reserve Bank of India at its apex. It is the central bank of the
country. It has all the powers to regulate the working system of all the subordinate banks of the
nation and all the subordinate banks are required to follow the guidelines of the RBI. Central
bank is known as banker’s bank. They have the authority to implement monetary and credit
policies. It is owned by the government of a nation and has the monopoly power of issuing notes.
The functions of Reserve bank are as follows:

§ It is known as banker’s bank.
§ It is a banker to the central and state governments.
§ It issues currency.
§ It manages the foreign exchange management in the country.

§ Helps in the development of the country by providing larger funds.

Under the Reserve bank of India act, 1934, the banking system is divided into two parts:
§ Scheduled banks
§ Non- Scheduled banks

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 Rupees 5 lakhs and which satisfy RBI that their affairs are carried out in the
interests of their depositors. All commercial banks- Indian and foreign, regional rural banks and
state co-operative banks-are scheduled banks.

Non –scheduled banks are further classified into commercial banks and co-operative banks.
Commercial banks are the oldest banking institutions and they consist of a bigger share in the
total banking intuitions of the country. Commercial banks are meant for profit making and for
financial trade. They charge high rate of interest from their borrowers and pay less rate of
interest to their depositors that makes profit to their banks. The example Commercial Banks are
Punjab National Bank, Allahabad Bank, Canara Bank, Andhra Bank, Bank of Baroda, etc.
The commercial banks are further divided into:

• Public sector banks
• Private sector banks
3.3.1. PUBLIC SECTOR BANKS
The Public sector banks itself denotes by its names occupies a larger amount of stake that is held
by the government. For Ex. State bank of India is a public bank. The government occupies at
least 50% of the shares in the market.
Public sector banks are further classified into:
§ Nationalized banks
§ State bank of India and its associates.

3.3.1.1. Nationalized banks

There are 20 nationalized banks in India. Such as Bank of Baroda, Canara bank, Bank of India,
Punjab National bank etc. The nationalized banks gives higher quality of benefits as comparison
from the other banks in India because they are strong in their transaction service. They have
maintain proper balance sheets other than from the ordinary banks. They also provides a fixed
exchange rates to their customers. They have a improved technology of issuing credit cards,
cheque debit cash etc. for faster transactions. Nationalized banks in India also offers insurance
services to their customers.
Nationalized banks act as way to protect the safety of the savings of the public. This is the main
motto of the nationalized banks.

3.3.1.2. State Bank of India and its Associates
The origin of State Bank of India started in 19th century with the establishment of the bank of
Calcutta in Calcutta on June 1866. The state bank of India was established under the state bank
of India act, 1955. The State Bank of India acts as an agent of the Reserve Bank of India. It
carries all the transactions of the State.
“The Reserve Bank shall appoint the state bank as its sole agent at all the places in India where it
doesn’t have an office or branch of its banking department and there is a branch of the state bank
or branch of the subsidiary banks.”8
On 1st April 2017, was the record date in India as a merger of State Bank of India took place with
five Associates Banks and Bhartiya Mahila Bank. The five Associates banks are:

1. State Bank of Bikaner and Jaipur
2. State Bank of Mysore
3. State Bank of Travancore
4. State Bank of Hyderabad
5. State Bank of Patiala

3.3.2. PRIVATE SECTOR BANKS

8 Section 45 of the Reserve Bank of India Act, 1934

The Private Banks are those banks which holds a majority share capital of the bank that is held
by the private individuals. The companies which are private limited put their shares in the private
banks there is no interference by the government in those kinds of banks. These banks have
limited liabilities.
Examples of Private Sector Banks are: ICICI Bank, Axis Bank, HDFC Bank etc.

3.3.3. SCHEDULED CO-OPERATIVE BANKS

The Co-operative banks performs basic functions of banking systems but they are different from
commercial banks. The co-operatives banks have been establishes under the co-operative
societies acts, 1965 of different states. These institutions are totally owned by its members.
Members have a professional community to give services like Loans, Deposits etc…These banks
are costumer owned there are mainly working for profits and then the profits are distributed
among its members. The co-operative banks have three tier set up. The State co-operative banks
is the apex institution in a state, while central/ district co-operative banks functions at the district
level and primary credit societies work at the village level . They are different from commercial
banks as not all the sections of the banking regulations act are applicable to co-operative bank.
The ultimate motive of scheduled co-operative banks is the participation of the community and
the growth and benefit of the community.

3.4. DEPOSIT ACCOUNTS AND HANDLING CUSTOMER COMPLAINTS

Deposit accounts means which includes saving accounts, current account or any other type of
accounts. There are various types of deposit accounts namely:

§ Fixed Deposit Accounts
§ Current Accounts
§ Savings Accounts
§ Recurring Deposits

3.4.1. FIXED DEPOSIT ACCOUNTS

The Fixed deposit are payable on the fixed maturity rate with the principal amount and also with
the agreed interest rate. The interest rate is fixed. They are also known as “Term Deposits”. The
fixed deposits refers to the amount to be payable on the expiry of a specified period, that is
chosen by the depositor to enable him to get the money back whenever he is in need.

The banks gives high rates of Interest in fixed deposits accounts. The rates of interest on which
the banks accepted fixed deposits are regulated by the Reserve Bank of India that is provided in
Section 21 and 35A of the Banking Regulation Act, 1949. The minimum period of fixed deposit
is seven days as per the Reserve Bank of India.

3.4.2. RECURRING DEPOSITS

Recurring deposits is also known as Cumulative Deposit Accounts. These are introduced in
recent years in the Banking System. These accounts are for the person who doesn’t have lump
sum amount to save but they are willing to deposit the amount on a monthly basis and the total
amount is payable after the expiry of the said period with the agreed interest rate. The period of
deposit is minimum of 6 months and maximum of 10 years.

3.4.3. CURRENT ACCOUNTS

Current account are mainly for the business man, firms which are never used for the purpose of
the savings and investment of the money. There is no restriction on the number and the amount
that the depositor do for the transactions from the current account. The banker is also in no need
to pay any interest rate to the depositor.
The current account is meant for the convenience of the person who does not wants to carry a big
amount of cash in their hands. The bankers some time take service charges on these kinds of
deposits.

3.4.4. SAVINGS ACCOUNTS

Savings accounts is meant for the purpose of the lower and middle class person who wants to
save a part of their incomes to their future need. The current accounts are better than the savings
account. Because the banks requires the minimum balance to be maintained in the savings
accounts. They also levy charges on the non-maintenance of the minimum balance. Different
banks have different minimum balance for the saving accounts.

The Reserve Bank of India has prohibited the banks to open a saving account in the name of any
trading company which is proprietary or a partnership firm. The banks should not open a savings
account in the name of:

§ Government departments,
§ Bodies depending upon budgetary allocations for performance of their functions,
§ Municipal Corporations,
§ Panchayat Samitis,
§ State housing boards,
§ State district level cooperative societies.

Complaint Management is one initiative under a strategy called Customer Experience
Management. By listening to customer, the companies, the banks can develop proper service
standards. A complaint is communication that is received to the bank from its customers through
any means either by oral, written, mail or any other communication. The customer in their
complaint expresses any dissatisfaction about an aspect of the bank system or service or from
their employee’s behavior.

A complaint may relate to:
§ Failure to provide a service
§ Inadequate standard of service
§ Dissatisfaction with Council policy
§ Treatment by or attitude of a member of staff

§ Disagreement with a decision where the customer cannot use another procedure (for
example an appeal) to resolve the matter

§ The Council’s failure to follow the appropriate administrative process.

3.4.5. PROCEDURE FOR COMPLAINT RESOLUTION

§ The customer can drop a complaint in the complaint box that will be placed in the main
baking hall.

§ The manager of the branch will take care of the complaint.
§ “A complaint cell” will be established at corporate office to receive, coordinate and

respond the customer complaints.
§ At the end of the day the manager will open the complaint box and will check all the

complaints that are sent by the customers.
§ The bank manager will logged all the complaints in the register by the end of the same

day.
§ 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.
A banker always renders a number of services to his customer. The relationship between a
banker and a customer is that of a creditor and a debtor. A complaint in relation to a service may
be fine if the customer suffers from any deficiency from the work of the bank. Banking
companies provide various services to the customers. Hence if any complaint is filed against
deficiency in service including banking services they can approach consumer forum.
On receipt of a complaint the District Forum may either allow the complaint to be proceeded
with or rejected with in twenty one days of the receipt of the complaint.
The District Forum shall need a copy of such complaint to the opposite party of the case within
thirty days. The District Forum shall have the powers of a civil court under the Code of Civil
Procedure 1908.

3.5. IMPORTANCE OF CUSTOMER SERVICE AND CUSTOMER RIGHTS

A banker renders various services to his customer as well as the general public. The main
function the banker is concerned that is acceptance of the deposits or lending money to customer.
The customer service should be genuine.
Points to be remember for customer service:

§ The Teller is the face of a bank. He is the person who has to deal with the customer most.
So they are the person who provide services to the customers.

§ Their level of service shows the image of the bank. A polite teller can enhance the
reputation of the bank.

§ Loan manager are another important members of a bank who develop a big impact on the
growth and the development. The manager of the bank who provides loan helps the bank
to get a big business deal.

§ With the increasing use of online banking, banking is becoming extremely important for
banks to provide online customers who are in need.

§ People nowadays uses online services to save their time. The helpful online customer
service can provide instant help to a customer looking for a quick solution.

3.5.1. CUSTOMER’S RIGHTS

The Central Bank has advised the Indian Banks Association and the Banking Codes to formulate
a 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
any customers on grounds of gender, age, religion or any form to discriminate the
customer. The banks cannot offer different rates of interest to the different customers.

§ Right to transparency, fair and honest dealing: the banks should make a document
which can be understood by the customer easily. The banks should make a contract that is
transparent and easily understood by the common people. The key fact of the contract

should be clearly disclosed. Any fact that cause disadvantage to the customer should be
disclosed.
§ Right to suitability: If the banker mis-cells the property that has been pledged to the
bank to the third person he will be responsible for that contract.
§ Right to privacy: Banks are responsible to keep all the private details of the customer
confidential. Right to privacy is also mentioned under the Indian Constitution Act. The
only way the bank can share the personal details of the customers only when the
customer gives permission to that.
§ Right to seek compensation: The right to seek compensation is the very important right
to the customers. If the bank makes anything which is against the benefit of the customer
the customer can seek compensation for that.