Basics of Banking: Introduction to Banking Business & Book Keeping

Banking has been defined under Section 5 of Banking Regulation Act – Clause (b)“banking” means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise; Section 6 permits banks to engage in certain classes of business which are incidental to the banking business. Section 8 prohibits banks from selling/purchasing of goods.

Section 6 of the Banking Regulation Act 1949 says that a Bank may engage in any one or more of the following forms of businesses in addition to the business of Banking these are :-

A. the borrowing, raising, or taking up of money; the lending or advancing of money either upon or without security; the drawing, making, accepting, discounting, buying, selling, collecting and dealing in bills of exchange, Hundis, promissory notes, cou­pons, drafts, bills of lading, railway receipts, warrants, deben­tures, certificates, scrips and other instruments and securities whether transferable or negotiable or not; the granting and issuing of letters of credit, traveller’s 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 loans 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;

B. acting as agents for any Government or local authority or any other person or persons; the carrying on of agency business of any description including the clearing and forwarding of goods, giving of receipts and discharges and otherwise acting as an attorney on behalf of customers, but excluding the business of a [managing agent or secretary and treasurer] of a company;

C. contracting for public and private loans and negotiating and issuing the same;

D. the effecting, insuring, guaranteeing, underwriting, partici­pating in managing and carrying out of any issue, public or private, of State, municipal or other loans or of shares, stock, debentures, or debenture stock of any company, corporation or association and the lending of money for the purpose of any such issue;

E. carrying on and transacting every kind of guarantee and indemnity business;

F. managing, selling and realising any property which may come into the possession of the company in satisfaction or part satis­faction of any of its claims;

G. acquiring and holding and generally dealing with any property or any right, title or interest in any such property which may form the security or part of the security for any loans or ad­vances or which may be connected with any such security;

H. undertaking and executing trusts;

I. undertaking the administration of estates as executor, trus­tee or otherwise;

J. establishing and supporting or aiding in the establishment and support of associations, institutions, funds, trusts and conven­iences calculated to benefit employees or ex-employees of the company or the dependents or connections of such persons; grant­ing pensions and allowances and making payments towards insur­ance; subscribing to or guaranteeing moneys for charitable or benevolent objects or for any exhibition or for any public, general or useful object;

K. the acquisition, construction, maintenance and alteration of any building or works necessary or convenient for the purposes of the company;

L. 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;

M. acquiring and undertaking the whole or any part of the business of any person or company, when such business is of a nature enumerated or described in this sub-section;

N. doing all such other things as are incidental or conducive to the promotion or advancement of the business of the company;

O. 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.

Restriction on  Business of Banking Company : Section 8 of the Banking Regulation Act 1949 imposes certain restrictions :

Prohibition of trading.—Notwithstanding anything contained in section 6 or in any contract, no banking company shall directly or indirectly deal in the buying or selling or bartering of goods, except in connection with the realisation of security given to or held by it, or engage in any trade, or buy, sell or barter goods for others otherwise than in connection with bills of exchange received for collection or negotiation or with such of its business as is referred to in clause

(i) of sub-section (1) of section 6: [Provided that this section shall not apply to any such business as is specified in pursuance of clause (o) of sub-section (1) of section 6.]

Explanation.—For the purposes of this section, “goods” means every kind of movable property, other than actionable claims, stocks, shares, money, bullion and specie, and all instruments referred to in clause (a) of sub-section (1) of section 6.

Book-Keeping System in Banks (Peculiarities) : Under bank’s Bookkeeping system, every transaction particularly concerning the customers is entered in the personal ledger directly from vouchers as soon as it takes place. Banker’s Books defined under Section 2(3) of Banker’s book evidence Act 1891 – They include, ledgers, daybooks, cash books, account books and all records used in the ordinary business of a bank, These records maybe kept in written form or stored in any form of mechanical or electronic device from which data can be easily accessed.

Main Aspects of a Bank’s Book-Keeping System

Slip System : Slip System of accounts refers to the details of transaction written and signed on paper slip and serially numbered. This system was in existence prior to Voucher System where Printed Vouchers, Pay in Slips, paid instruments are used now.

With the introduction of core banking System (CBS), The accounting module handles some of the accounting processes automatically; and normally it is an end to end processing (A process that takes a system or service from beginning to end and delivers a complete functional solution, usually without needing to obtain anything from a third party).

Accounting module segregates the transactions as cash, transfer and clearing operations, when the teller opts for cash entry, there no need to prepare voucher for cash and post in cash head. The background accounting process automatically reduces/enhances the cash in hand GL head of account and then is the segregation of the target accounts – deposit accounts, loan accounts, income/fees or expenses like interest.