My Science School

       Ever noticed a small clause written on our banknotes? If you haven’t, take a close look at it. It is the promissory note, along with the signature of the RBI Governor.

         Let’s take an example. The promissory clause printed on the banknotes that read as ‘I promise to pay the bearer the sum of one hundred Rupees’ means that the banknote with you is a legal tender for the given amount. It is also the promise made by the Governor of the central bank.

            The clause acts as a written guarantee made by the bank regarding the genuineness of note, and its value. It is invariably seen on all banknotes printed in the country. 

           Although money lending and other kinds of informal transactions existed during ancient and medieval times, banking in its modern sense originated in India only in the last decades of the 18th century.

           It was the Bank of Hindustan that marked a beginning to the banking trend in 1770. The General Bank of India came later, in 1786, but it failed within five years. The Bank of Hindustan too closed down between 1829 - 32.

           In spite of the initial failure, banking in the country flourished after the establishment of the three powerful banks -the Bank of Bengal in 1806, the Bank of Bombay in 1840, and the Bank of Madras in 1843. These were the Presidency banks that later merged to form the Imperial Bank of India in 1921.

           Upon the Independence, it was subsequently transformed into the State Bank of India that we now have, the oldest and the largest bank in the country.

 

Continue reading "Why is it said that banking in the modern sense developed in India in the 18th century? "

         The Reserve Bank of India was founded on April 1, 1935, constituted under the Reserve Bank of India Act 1934. It was a shareholder’s bank then, and remained so until its nationalization in 1949. It has been fully owned by the Indian government ever since.

         It was the financial troubles caused by the First World War that led to the establishment of the Reserve Bank. It is believed that the British were forced to transfer the responsibility of central banking to Indian hands, due to financial, as well as political reasons.

          The main idea behind the formation of the bank was to make it a regulatory body to issue banknotes, and to secure the country’s monetary stability. It also operated the currency and credit system, and still continues to do it.

           The bank was established on the recommendation of the Hilton-Young Commission. The first logo of the bank was inspired from the East India Company’s double mohur.

           Did you know that the bank was also the currency issuing body for countries like Burma and Pakistan? Till 1942, the Reserve Bank issued currencies to Burma, today’s Myanmar. It was also the banker to the Government of Burma till 1947. The following year, in 1948, the RBI stopped rendering currency notes to Pakistan too. 

          The Reserve Bank of India has the sole right to produce currency notes of all denominations in the country. Other than this, it has many other functions.

          The RBI is responsible for formulating, implementing, and monitoring the monetary policies in the country. It also means that the bank takes care of maintaining price stability within the country.

          Acting as a governmental agent, the RBI distributes coins all over the country. It is also known as a ‘banker’s bank’, as it provides aid to all other banks functioning in the country. Every bank has to have a license from the RBI for operating within the country.

          The RBI performs me-chant banking functions for the central and state governments, and manages the country’s foreign exchange too.

           The bank is also responsible for exchanging and destroying currency notes that are unfit for circulation. These are just some of the functions of the RBI.

 

         Yes, it is the Reserve Bank of India that issues banknotes needed for the country. But have you ever wondered on what basis they issue the currency notes? Most certainly, on a demand-basis.

         The value and amount of banknotes to be printed are decided by the RBI. Based on the demand for a particular currency, it is issued and circulated.

          Let us take an example from the present day situation. People are in great need for currency notes in larger denominations like 500. To make up this need, the RBI note issuing unit in Mysuru stopped printing all other banknotes, and began to produce the new series of Rs 500 exclusively. This is what is meant by demand-based production.

            The bank also issues currency depending on the number of soiled notes that are returned to it.

            The new banknotes are distributed through various RBI offices located in Ahmadabad, Belapur, Bhubaneshwar, Kolkata, Bangalore, Chandigarh, Hyderabad, Guwahati, Chennai, Lucknow, Kanpur, Bhopal, Patna, Jaipur, New Delhi, Nagpur, Jammu, Kochi, Thiruvananthapuram and Mumbai.

            These offices receive and ensure the circulation of fresh banknotes issued by the central bank. 

         Broadly, the Indian banking sector can be divided into two types of banks- scheduled and non-scheduled.

          Scheduled banks are those listed in the 2nd schedule of the RBI Act, 1934. As per law, the paid up capital and collected funds in these banks should not be less than Rs 5 lakhs. They are also eligible for loans from the central bank.

          Scheduled banks are further classified into nationalized banks, the State Bank of India and its associate banks, regional rural Banks (RRBs), foreign banks, and private banks. Some of the state and urban co-operative banks too come under this category.

          Allahabad Bank, Bank of India, Canara Bank, Indian Bank, Punjab and Sindh Bank, Punjab National Bank, Union Bank of India, Vijaya Bank, and Dena Bank are among the 27 nationalized banks in the country.

         State Bank of Travancore, State Bank of Mysore, State Bank of Hyderabad etc. are the associate banks of the State Bank of India. It was in 1960 that SBI took over control of these associate banks.

         The IDBI Bank and the Bharatiya Mahila Bank are other two important public sector banks functioning in the country.

 

Continue reading "What are the major types of banks existing in our country? "

         Until the 1960s, all banks except the State Bank of India remained under the ownership and management of private persons. By then, banks had become an important tool for the development of economy.

         In a sudden and unexpected move that marked a major change in our history, the then Prime Minister Indira Gandhi announced the nationalization of 14 commercial banks with effect from the midnight of July 19th, 1969. These were the banks that managed around 85 per cent of the country’s deposits.

         One of the biggest changes caused by nationalization was equipping banks to work for social welfare. Sensitive sectors like agriculture and rural industries were greatly benefitted by the move.

          Nationalization helped improve the public’s confidence in banking. Altogether nationalization strengthened India’s banking network.

         The second phase of nationalization took place in 1980, when six more commercial banks were nationalized.

 

         In its literal sense, ‘liberalization’ means relaxation of restrictions or regulations. It was a policy adopted in our country almost two decades ago. It was introduced in the 1990s in our banking sector too. Manmohan Singh was the finance minister then. So, what exactly did this process mean?

        Liberalization as a policy meant the removal of some restrictions imposed by the government on its various sectors.

         The move towards liberalization not only enhanced the growth of our economy, but also boosted our banking system.

          Till then, there were strict regulations on many matters including the interest rate, lending, and foreign participation.

          With liberalization, many private banks were given license to operate in the country. These banks including the ICICI Bank, Induslnd Bank, HDFC Bank, Axis Bank etc are popularly known as the new generation banks. Contributions from the public sector, private sector and foreign banks together made the system stronger and stable. 

As the name suggests, co-operative societies are groups working based on the principles of co-operation, joint ownership, mutual help, and democratic decision making.

Banks formed by these societies, popularly known as co-operative banks, are thus, small financial entities created for banking purposes by persons belonging to a locality, or professional community, or even by those who share common interests.

Operating both in urban and rural centres in our country, co-operative banks provide banking services like savings and loans to members as well as non-members.

Although they are smaller than commercial banks, co-operative banks have been successful in financing areas under agriculture, personal finance, self employment, small scale industries etc.

The banking system has a three-tier set up. The state co-operative bank is at the apex level, the district co-operative bank is at the district level, and primary co-operative societies are at the rural level.

Compared to others, these banks provide a little higher rate of interest on deposits. They mainly work on the principle of ‘no profit, no loss’. Anyonya Sahakari Mandali, established in 1889 in the province of Baroda, is known to be the earliest known cooperative credit union in our country. They played a significant role in our economy. 

         Negotiable instruments are those that can be converted into liquid cash under certain conditions like that of a cheque.

         The transactions of these instruments in our country are regulated by a law titled the Negotiable Instruments Act, framed in the year 1881. According to this, the three negotiable instruments that can be used are - a promissory note, a cheque, or a bill of exchange.

         The Act is quite important to our banking sector as it gives statutory definitions for these three instruments as well as the conditions under which they can be used. Besides, a certain section of the Act - Section 138 - is a step towards justice.

         As per this section, if a cheque issued by someone is bounces due to an insufficient amount in his account, it is an offence. This section inserted later in 1988 was a major change in banking, because till then, there were no provisions to restrain a person from issuing a cheque without sufficient money in his account. 

          This concept surely seems familiar to all of us, as it is now filling newspapers and newsrooms across the country.

          Demonetization is the legal act of making a currency invalid, and replacing it with a new one. In other words, it could be the removal of a particular currency, say Rs 500, from circulation, and issuing a new one of equivalent value or denomination. Demonetization also happens when the currency of a nation changes.

          Many instances of demonetization have taken place in the world. One classic example would be the withdrawal of currencies in countries under the European Union to replace them with the euro. However, it was not a sudden and unexpected move. People in those countries were given enough time to convert the older currencies to the euro in order to ensure a smooth transition.

           Such a move could definitely affect people, but as a process, demonetization has proved effective in controlling counterfeiting and black money in any country. 

        Many countries in the world have faced the process of demonetization at different periods. Some succeeded and others ended up in failure. One such failed attempt happened in the erstwhile Soviet Union in 1991.

        Under the leadership of Mikhail Gorbachev, a sudden monetary reform was initiated on January 22nd. At around 9 pm, televisions announced the President’s withdrawal of the 50 and 100 ruble banknotes from circulation. The move was to control black money and counterfeit. However, it created a stir in the public. Some were able to make exchanges for the currencies with them but most of the people couldn’t, because the exchange had many limitations. There were only three days given for exchange, and only 1000 rubles were to be given to a person.

        Although the bid to control malpractices succeeded to an extent, demonetization had a huge negative effect. Within months, consumer prices increased, and people started losing jobs. Within eight months, Gorbachev faced a coup.

        The monetary reform of 1991, as it is popularly called, later led to a redenomination of the ruble in 1998.

Australia is a country that once successfully demonetized its currency. In 1996, the country replaced its banknotes with their plastic or polymer equivalents. The move was intended to fight financial malpractices that were growing rampant.

            Like all other countries, Australia too, was facing severe problems caused by counterfeit currencies and black money. It was then that the Reserve Bank of Australia developed polymer notes with better security features.

            The initial steps of the process began in 1988, when the bank issued a commemorative 10 – dollar polymer bank note. Later in 1996, all the existing currency notes were made invalid and the new ones entered circulation. They came in all denominations from 5 to 100 dollars.

            As the withdrawal and replacement happened in various steps, it was not too difficult for the country to switch to a new system.

            In spite of the initial costs incurred to manufacture the new notes, the move was successful and it also helped in making the country business friendly.

            The concept of demonetization is not something new in modern India as it had gone through the same twice before – in 1946, and 1978.

            Did you know that we once had the banknotes of Rs 10,000? Those notes were the largest currency denomination printed by our central bank, the Reserve Bank of India. It happened in 1938 and in 1954.

            The year before the country gained independence, banknotes in denomination of 1000 and 10,000 were taken out of circulation. This move that came in January 1946 was as part of the country’s effort to prevent black money. It is said that the invalid notes were sold or exchanged at 60 to 70 per cent of their price. The sudden withdrawal of the currencies had become a ‘death blow’ to tax evaders.

            However, those banknotes along with that of Rs 5000 were later reintroduced in 1954. The second instance of demonetization in modern India happened in January 1978. The government headed by Morarji Desai, withdrew from circulation notes of Rs 1000, Rs 5000 and Rs 10,000. The reason behind this was to stop the circulation of counterfeit currencies.

            The currencies of Rs 500 and Rs 1000, however, returned to circulation later. In 1987, the Rs 500 note was reintroduced and the latter, in 2000.