Commercial Bank
• It refers to an institution that deals in money. It accepts deposits from the public and advances loans to those who are in need.
Characteristics of Commercial Banks
• Commercial Establishment
• Accept Deposits
• Fixed Deposit, Current Deposit, Saving Deposit, Recurring Deposit
• Repayment to accepted deposits
• Financial Intermediaries – Deals in other people’s money
• Withdrawal by Cheques, Drafts or Otherwise
• Advancing Loans to Public
• Earning Profit
Functions of Commercial Banks
• Primary Functions: 1. Accepting Deposits 2. Advancing Loans
• Money at Call – From 1 to 14 Days, usually made to other banks
• Overdraft -
• Cash Credit – Bank enters the amount of loans in the account and interest is chargeable from the day the loan is sanctioned.
• Discounting of Bills
• Credit to Government
3. Creation of Credit – When a bank advances a loan it doesn’t lend cash but opens an account in favour of the customer and credits the amount to the account.
4. Cheque System of Payment Funds
Secondary Functions
• Agency Functions:
1. Collection and payment of credit – Collect cheques, bills of exchange, promissory notes and make payments of rent, tax etc on behalf of
customer.
2. Purchase & Sale of Securities –
3. Trustee & Executor – undertake administration of will or settlement and trusteeship functions through its expert advice.
4. Remittance of Money – Mail transfers, telegraphic transfers etc.
5. Representation & Correspondence – obtaining travel tickets, booking of vehicles
6. Bullion Trading – allowed to import gold under open general license category in October 2017.
• General Utility Services:
1. Locker Facilities
2. Acting as a referee – information about financial position of the customer to domestic & foreign traders, by customer’s approval
3. Issuing letter of credit – certify credit worthiness 4. Acting as Underwriters
5. Issuing of Traveller’s Cheques 6. Issuing of Gift Cheques
7. Dealing in Foreign Exchange 8. Merchant Banking Services
Development Functions
1. Mobilization of Savings
2. Extension of banking services in rural areas 3. Providing loans to weaker section
4. Assistance to Capital Market – giving long term loans
to industry, agriculture, traders etc
Modern Functions
1. Automatic Teller Machines (ATM) cum Debit Cards 2. Credit Cards
3. Mail transfer and Telegraphic Transfers 4. Tele – Banking
5. Internet Banking
6. Round the clock Banking
Role of Commercial Banks in Economic Development
• Helpful in mobilization of savings
• Assist in Innovations
• Implementation of Monetary Policy
• Bank influence the interest rates
• Helpful in the development of priority sector
• Directing funds into desired channels
• Helpful in productive activities and export
• Implementation of the policies of the government
Types of Banks
• Second Schedule of the Reserve Bank of India Act
• Domicile
• Ownership
• Functions or Specialized Area
Scheduled Banks
• Which is registered in the second schedule of the RBI. These conditions must be fulfilled by a bank for inclusion in the
schedule:
• The banker concerned must be in business of banking in India.
• It is either a company defined in Sec3 of the Indian companies Act, 1956, or corporation or a company incorporated by or under any law in force in any place outside India or an institution notified by the Central Govt in this behalf.
• It must have paid-up capital and reserves of an aggregate real or exchangeable value of not less than ₹500000.
• It must satisfy the RBI that its affairs are not conducted in a manner detrimental to the interests of its depositors.
• Scheduled banks come under the purview of the various credit control measures of the RBI. They are required to maintain a certain minimum balance in their accounts with the RBI. The scheduled banks are
entitled to borrowings and rediscounting facilities from the RBI.
•
• Indian Scheduled Banks may be distinguished in two broad sectors:
• Public Sector Commercial Banking comprising the SBI & its subsidiaries and 20 nationalised banks.
• Private Sector Commercial Banking comprising all the other Indian scheduled banks that do not fall in the above group.
Non Scheduled Banks
• Not included in the Second Schedule of RBI, classified into 4 groups:
• Banks with paid-up capital and reserves in excess of ₹5 Lakhs
• Banks with paid-up capital and reserves ranging between ₹50000 - ₹1 Lakh
• Banks with paid-up capital and reserves ranging between ₹1 Lakh - ₹5 Lakh
• Banks with paid-up capital and reserves below ₹50000
On the basis of Domicile
• Scheduled Banks may be classified into two groups:
1. Indian Scheduled Banks are those which have their registered offices in Indi and are registered in the second scheduled of the RBI.
2. Foreign Scheduled Banks comprise those commercial banks which are registered in the said schedule but have their
registered offices outside India.
On the basis of Ownership
• Public Sector Banks – Owned by govt, 20 banks were nationalized in 1969 &
1980.
• Private Sector Bank – Owned & run by private sector, HDFC Bank, ICICI Bank
• Co-operative Banks – Jointly run by a group of individuals, each individual has an equal share in these banks, managed by its shareholders, profit is also distributed equally. Co-operative Societies Act 1912.
Three Tier system:-
• The Primary Credit Societies – 10 or more members residing in a particular area, each member contribute to the share capital of
societies, liability of each member is unlimited, usually lend for short periods.
• Central Co-operative Banks: certain area or district, finance primary co- operative societies, have their own capital and also get deposit from public, get loans from state co-operative banks and grant loans to
primary societies and individuals.
• State Co-operative Banks – Apex Banks, get their funds mainly from public, commercial banks and even RBI, finance central co-operative banks, coordinate their activities and control their working.
Classification according to functions
• Commercial Bank
• Industrial Bank – Offer medium & long term loans to the industries and also work for their development. Help the industries in the sale of their debenture, bond and shares. Purchase the shares as well as underwrite the debenture and shares of the industries. Provide loans to the industries for the purchase of land &
machinery. Industrial Banks raise funds through long term instruments like bonds with a maturity period of 20-25 years. IDBI, IFC, SFC
• Agriculture Banks – provide credit to agricultural sector of the economy. Provide long and short-term finance to agriculturists and farmers. Needs of agriculture is very much different from other sectors.
• Exchange Banks – deals in foreign exchange, not separate institutions. Infact commercial bank which acquire
authorisation from the RBI.
• Discounting of foreign bills of exchange
• Foreign remittances
• Purchasing & selling of gold & silver
• Issue of letter of credit
• Facilitate & finance international trade
• Saving Banks – collect small savings from across the country and put them to the productive use. Aim at inculcating the habit of saving among the working class.
• Indegenous Banks – originated by mahajans, rural money
lenders, jewellers. Employ their own capital, don’t get deposits from public. Grant loans against securities such as gold,
jewellery, land promissory notes, hundis etc. They main their account according to the Mahajani System.
Classification on the Basis of Organization Structure
• Unit Banking – is a system in which a bank operates in a specified area generally small & limited area. A unit bank performs its activities through a single office within limited resources having no branch office . It often referred to as localised banking. The operations are confined to specific places. Originated in USA.
• Branch Banking – A branch has a large network of branches
scattered all over the country. It refers to the system of banking in which a bank establishes its head office in some big city and operates various branches all over the country.
• Chain Banking – Same individual or group of individuals control two or more banks. In this system a group of individual
purchase the bulk of shares of two or more banks to control &
manage them. Every bank has its own identity and independent board of management
• Group Banking – two or more banks are brought under the
control of the same management through a holding company.
• Correspondent Banking – small banks serving local
communities by depositing funds with joint banks serving in big cities.
Basis of Difference Fixed Deposit Account Savings Deposit Account Current Deposit Account
Object To earn interest Develop habit of saving Assist the business
Period of Deposit Fixed Period No Fixed Period No Fixed Period
Frequency of Deposits Once Large number No restrictions
Restrictions on withdrawals At Maturity 50 withdrawals per 6 months
No restrictions
Interest High Low No interest
Cheque facility No Yes Yes
Recommendations of Narasimham Committee – I
• Phased reduction of Statutory Pre-emptions – SLR & CRR should be reduced by 25% & 10%.
• Phasing out of Directed Credit Porgramme – Redefined sector should be fixed @ 10% of aggregate credit.
• Capital Adequacy Ratio – Banks & financial institutions should achieve a
minimum 4% capital adequacy ratio in relation to risk weightage assets by March 1993 and 8% by March 1996.
• Income Recognition – Evaluation of assets of banks should be done on the basis of their realisable values. Banks & financial institutions should adopt uniform accounting practices.
• Transparency
• Loan Recovery
• Tackling doubtful debts – Assets Reconstruction Fund should be created to take over bad debt of the banks on discount and
balance sheet should be made clean as a one time exercise.
• Entry of Private Banks – No further nationalization and equal treatment to public & private sector banks.
• Branch Licensing – should be abolished and would be decide by individual banks
• Foreign Banks
• Control of Banking System – purely by RBI
