Banking and Insurance Services

Notes 10 Pages

Savitribai Phule Pune University

Bachelor of Business Administration

AYK

Contributed by

Alpa Yash Khare

Chitra.V
Lecturer commerce and management
MESIOM Rajajinagar, Bangalore
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Introduction
A financial system is an important tool for a country that wants to develop economically.
The reason is that it helps in the creation of wealth by a way of investments. That is
why there are different types of financial services available to facilitate the requirement.
One of the important ways for a country to control financial transactions and services is
through banks. Banking in India has been a backbone to so many businesses in the
past as well as in the present times. It started in the 18th century and is still going
strong. Different types of banks are central banks, commercial banks, investment
banks, cooperative banks, postal banks. Let us see the introduction of Banks.
Banking is a business. Banks sell their services to earn money, and they must market
and manage those services in a competitive field. Banks are financial intermediaries
that safeguard, transfer, exchange, and lend money and like other businesses that
must earn a profit to survive.
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Traditional Services of Banking
1) Accepting Deposits: the most important function of commercial banks is to accept
deposits from the public. Various sections of society, according to their needs and
economic condition, deposit their savings with the banks. For example, fixed and low
income group people deposit their savings in small amounts from the points of view
of security, income and saving promotion.
2) Issuing loans: loans are made against personal security, gold and silver, stocks of
goods and other assets. The 2
nd
primary function of a commercial bank is to make
loans and advances to all types of persons, particularly to businessmen and
entrepreneurs.
3) Overdraft: overdraft is the amount by which withdrawals exceed deposits or the
extension of credit by a lending institution to allow for such a situation. A bank
overdraft is a limit on borrowing on a bank current account.
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4) Discounting of bills of exchange: it is an instrument in writing containing an
unconditional order, signed by the maker, directing a certain person to pay a certain sum
of money only to, or to the order, a certain person or to the Bearer of the instrument.
5) Credit Creation: is a multiple expansions of banks demand deposits. It is an open
secret that banks advance a major portion of their deposits to the borrowers and keep
smaller parts of deposits to the customers on demand.
6) Investment of Funds: the banks invest their surplus funds in 3 types of securities:
government securities, other approved securities and other securities. Government
securities include both, central and state governments, such as treasury bills, national
savings certificate etc.
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7) Agency Functions: commercial banks act as attorney for their clients. They buy and sell
shares and bonds, receive and pay utility bills, premiums, dividends, rents and interest for
their clients. Banks also perform certain agency functions for and on behalf of their
customers. The agency services are of immense value to the people at large.
8) General Utility Services: are those services which are rendered by commercial banks
not only to the customers but also to the general public. In addition to agency services, the
modern banks provide many general utility services for the community as given below:
a. Safe Deposit Vault.
b. Collection of cheques, bills and promissory notes.
c. Issuing letter of credit.
d. Bank drafts.

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Modern Services of Banking
1. Core Banking Service: it is defined as the business conducted by a banking institution with its
retail and small business customers. Many banks treat the retail customers as their core
banking customers, and have a separate line of business to manage small businesses. Larger
businesses are managed via the corporate banking division of the institution. Core banking
basically is depositing and lending of money.
2. Internet Banking Service: it refers to a system allowing individuals to perform banking activities
at home, via the internet. Internet banking allows customers to conduct financial transactions on
a secure website operated by their retail or virtual bank.
3. Automated Teller Machine (ATM) Service: is an electronic computerised telecommunication
device that allows a financial institutions customers to directly use a secure method of
communication to access their bank accounts, order or make cash withdrawals and cheque their
account balances without the need for a human bank teller.
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4. E-Banking Service: is defined as the automated delivery of new and
traditional banking products and services directly to customers through
electronic, interactive communication channels.
5. Telebanking Service: a system which enables banking transactions to be
carried out by means of a telecommunication network, most commonly
achieved through a view data system or an interactive computer link, or
sometimes over an interactive cable TV network, with provision for the user to
send signals to the bank.
6. Standing Instructions: is an order to a bank by a customer where a fixed
amount of money is transferred at regular intervals. The funds are deducted
from the customers account and deposited in a selected recipients account.
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Recent Trends in Banking Services
1. Electronic Payment Services – E Cheques: now-a-days we are hearing about e-goverance, e-mail,
e-commerce, e-tail etc. In the same manner, a new technology is being developed in US for
introduction of e-cheque, which will eventually replace the conventional paper cheque. India, as
harbinger to the introduction of e-cheque, the Negotiable Instruments Act has already been
amended to include; Truncated cheque and E-cheque instruments.
2. Real Time Gross Settlement (RTGS): introduced in India since March 2004, is a system through
which electronics instructions can be given by banks to transfer funds from their account to the
account of another bank. The RTGS system is maintained and operated by the RBI and provides a
means of efficient and faster funds transfer among banks facilitating their financial operations.
The transfer takes place on a ‘Real Time’ basis. Therefore, money can reach the beneficiary
instantaneously and the beneficiary’s bank has the responsibility to credit the beneficiary’s
account within two hours.
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3. Electronic Funds Transfer (ETF): is a system whereby anyone who wants to make
payment to another person/company etc. can approach his bank and make cash payment
or give instructions/authorization to transfer funds directly from his own account to the
bank account of the receiver/beneficiary. Complete details such as the receivers name,
bank account number, account type, bank name, city, branch name etc. should be
furnished to the bank at the time of requesting for such transfers so that the amount
reaches the beneficiaries account correctly and faster. RBI is the service provider of EFT.
4. Electronic Clearing Service (ECS): is a retail payment system that can be used to
make bulk payments/receipts of a similar nature especially where each individual payment
is of a repetitive nature and of relatively smaller amount. This facility is meant for
companies and government departments to make/receive large volumes of payments
rather than for funds transfers by individuals.
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5. Point of Sale Terminal: is a computer terminal that is linked online to the computerised
customer information files in a bank and magnetically encoded plastic transaction card that
identifies the customer to the computer. During a transaction, the customer’s account is
debited and the retailer’s account is credited by the computer for the amount of purchase.
6. Electronic Data Interchange(EDI): is the electronic exchange of business documents
like purchase order, invoices, shipping notices, receiving advices etc. in a standard,
computer processed, universally accepted format between trading partners. EDI can also
be used to transmit financial information and payments in electronic form.
7. Credit Cards: is a plastic card issued by banks to its loyal customers which enables a
customer to purchase goods and services from certain retail and service establishments up
to a certain limit without making immediate payment.
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