Proportional Reserve System

First let's understand the meaning of three words, namely:

1. Proportion means a part, percentage or share of something regarded as a collective whole.
2. Reserve implies something valuable stocked up systematically or stored carefully often on a large scale at a secured location.
3. A System comprises a set of detailed procedures, routines, and methods that are supposed to be followed to perform certain activities.

In Proportional Reserve System (PRS), certain proportion or percentage of the reserves has to maintained in the form of precious metals like Gold. The remaining part of the reserves is to be kept in specific assets such as Government Securities and Commercial Bills. Such a balance is maintained to give backing (support) to the total volume of currency notes issued by the apex central bank of a nation like FED in the USA, RBI in India, etc.^[1]

For example, the Federal Reserve Act (1913) prescribed the Federal Reserve System (FED) of the USA to back currency notes issued by 40% Gold and remaining 60% by Government Securities.^[2]

RBI Issue Currency Notes in India

Reserve Bank of India (RBI) has a sole right to issue currency notes in India. This right is guaranteed only to a particular entity (a person or organization) and nobody else. It is an unshared authority, an exclusive privilege, or a monopoly to do something without open competition. It is usually granted by a sovereign authority (e.g. parliament) to execute significant tasks.

The Section 22(1) of Reserve Bank of India Act, 1934 (amended 7^th January 2013) empowers RBI with a sole right to issue banknotes of all allowed denominations for their circulation in India.^[1]

Currently, the bank notes issued in India range from a higher denomination of ₨.1000 to the lowest denomination of ₨.5.

Priority Sector Lending Meaning

Priority sector plays an important role in the economic development of the country. Therefore, the Central (Federal) Government of any country gives this sector priority (first preference) in obtaining loans from banks at a low rate of interest. This is known as a ‘Priority Sector Lending’.

Functions of Development Banks

The role or functions of development banks in India are depicted below.

Meaning of Development Banks

Development banks are specialized financial institutions. They provide medium and long-term finance to the industrial and agricultural sector. They provide finance to both private and public sector. Development banks are multipurpose financial institutions. They do term lending, investment in securities and other activities. They even promote saving and investment habit in the public.

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Non-Banking Activities

All banks perform non-banking activities along with their traditional functions.

Changing Role of Banks in India

The role of banks in India has changed a lot since economic reforms of 1991. These changes came due to LPG, i.e. liberalization, privatization and globalization policy being followed by GOI. Since then most traditional and outdated concepts, practices, procedures and methods of banking have changed significantly. Today, banks in India have become more customer-focused and service-oriented than they were before 1991. They now also give a lot of importance to their rural customers. They are even willing ready to help them and serve regularly the banking needs of country-side India.

The changing role of banks in India can be glanced in points depicted below.

The following points briefly highlight the changing role of banks in India.

1. Better customer service,
2. Mobile banking facility,
3. Bank on wheels scheme,
4. Portfolio management,
5. Issue of electro-magnetic cards,
6. Universal banking,
7. Automated teller machine (ATM),
8. Internet banking,
9. Encouragement to bank amalgamation,
10. Encouragement to personal loans,
11. Marketing of mutual funds,
12. Social banking, etc.

Banker-Customer Relationship

The relationship between banker and customer is mainly that of a debtor and creditor. However, they also share other relationships.

Some of the important relationships they share are depicted below.

The banker-customer relationship is that of a:

1. Debtor and Creditor,
2. Pledger and Pledgee,
3. Licensor and Licensee,
4. Bailor and Bailee,
5. Hypothecator and Hypothecatee,
6. Trustee and Beneficiary,
7. Agent and Principal,
8. Advisor and Client, and
9. Other miscellaneous relationships.

Merchant Banking Meaning

Merchant Banking is a combination of Banking and consultancy services. It provides consultancy to its clients for financial, marketing, managerial and legal matters. Consultancy means to provide advice, guidance and service for a fee. It helps a businessman to start a business. It helps to raise (collect) finance. It helps to expand and modernize the business. It helps in restructuring of a business. It helps to revive sick business units. It also helps companies to register, buy and sell shares at the stock exchange.

Universal Banking - Meaning

Universal banking is a combination of Commercial banking, Investment banking, Development banking, Insurance and many other financial activities. It is a place where all financial products are available under one roof. So, a universal bank is a bank which offers commercial bank functions plus other functions such as Merchant Banking, Mutual Funds, Factoring, Credit cards, Housing Finance, Auto loans, Retail loans, Insurance, etc.

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In the global market, the technology is becoming the driving force for bringing in the operational efficiency in banking industry. Several RBI committees on computerisation, in the recent past have recommended for adopting such technologies merged with the faster communication technology for the growth, development and profitability. Some of these electronic services in banking, which have come up recently, are described below.

What are the limitations of credit creation?

Commercial Banks though have the power to create credit, their powers are not unlimited. Certain points affect the process of credit creation. They are termed as limitations to credit creation by commercial banks.

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The limitations of credit creation by commercial banks are as follows :-

1. Amount of Deposit

The most important factor which decides credit creation is the amount of deposits made by the depositors. Higher is the amount of deposits, greater is the supply of credit and vice versa.

Introduction to Capital Adequacy Norms

Along with profitability and safety, banks also give importance to Solvency. Solvency refers to the situation where assets are equal to or more than liabilities. A bank should select its assets in such a way that the shareholders and depositors' interest are protected.

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1. Prudential Norms

The norms which are to be followed while investing funds are called "Prudential Norms." They are formulated to protect the interests of the shareholders and depositors. Prudential Norms are generally prescribed and implemented by the central bank of the country. Commercial Banks have to follow these norms to protect the interests of the customers.

For international banks, prudential norms were prescribed by the Bank for International Settlements popularly known as BIS. The BIS appointed a Basle Committee on Banking Supervision in 1988.

Measures to Solve Problems of NPA

The problems of NPA have been receiving greater attention since 1991 in India. The Narasimham Committee recommended a number of steps to reduce NPA. In the 1990's the Government of India (GOI) introduced a number of reforms to deals with the problems of NPA.

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Major steps taken to solve the problems of Non-Performing Assets in India :-

1. Debt Recovery Tribunals (DRTs)

Narasimham Committee Report I (1991) recommended the setting up of Special Tribunals to reduce the time required for settling cases. Accepting the recommendations, Debt Recovery Tribunals (DRTs) were established. There are 22 DRTs and 5 Debt Recovery Appellate Tribunals. This is insufficient to solve the problem all over the country (India).

Non-Performing Assets (NPA) - Meaning

Non-Performing Assets are popularly known as NPA. Commercial Banks assets are of various types.

All those assets which generate periodical income are called as Performing Assets (PA).

While all those assets which do not generate periodical income are called as Non-Performing Assets (NPA).

If the customers do not repay principal amount and interest for a certain period of time then such loans become non-performing assets (NPA). Thus non-performing assets are basically non-performing loans.

In India, the time frame given for classifying the asset as NPA is 180 days as compared to 45 days to 90 days of international norms.

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What are the Functions of Banks? Diagram ↓

The functions of banks are briefly highlighted in following Diagram or Chart.

These functions of banks are explained in following paragraphs of this article.

A. Primary Functions of Banks ↓

The primary functions of a bank are also known as banking functions. They are the main functions of a bank.

These primary functions of banks are explained below.

1. Meaning ↓

Saving account is a bank account which is opened by persons in order to save a part of their income.

Fixed Deposit (FD) account is that type of account where a fixed sum of money is deposited for a fixed period.

2. Purpose for Depositors ↓

The main purpose of savings account is to save a part of the income.

The main purpose of fixed deposit account is to get a lump sum amount on the maturity of the deposit.

Difference Between Saving and Current Account

The difference between saving and current account is discussed as follows:

1. Meaning

Saving account is opened by individuals for the purpose of saving a part of their income.

Current account is maintained by businessman and others who have to do regular bank transactions.

2. Purpose

The main purpose of opening a saving account is to save a part of the income.

The main purpose of opening a current account is to facilitate regular transactions.

1. Meaning ↓

In fixed deposit, a fixed sum of money is deposited for a fixed period.

Current account is operated by businessmen and others who have to do regular business transactions.

2. Purpose ↓

The main purpose of fixed deposit is to earn higher interest rate and get a lump sum amount on maturity.

The main purpose of current account is to facilitate regular transactions.

1. Meaning

A cheque is an unconditional order directing the banker to pay a certain sum of money only to or to the order of a certain person.

A draft is an order to pay money drawn by one office of a bank upon another office of the same bank for a sum of money payable to order on demand.

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2. Facility

The current account and saving account holders get a cheque facility.

Draft is issued to anyone even to non-account holders.