COMMERCIAL BANK

The organized banking system in India is divided into two categories- 1) Central Bank (Reserve Bank of India) 2) Commercial Banks

Commercial Banks accepts deposits for the purpose of lending. The difference between lending and borrowing rates of interest is profit of the bank. The lending rate of interest is kept higher than the rate of interest on borrowings.

According to Indian Banking Companies Act, “ Banking company is one which transacts the business of banking which means the accepting for the purpose of lending or investment of deposits of money from the public repayable on demand or otherwise and withdrawals by cheque, draft, order or otherwise.”

Functions of Commercial Banks

1)      Accepting of Deposits- The basic function of commercial bank is to accept deposits from the public. There are different types of accounts to attract public.

i) Fixed or Time Deposit Account- In this type of account, amount is accepted for a fixed period and deposited amount cannot be withdrawn before expiry of the period. The rate of interest on such account is higher than other accounts. If depositor withdraws before maturity, interest penalty is imposed on him.

ii) Current or Demand Deposit Account- Current account is opened by the businessmen who can withdraw the money several times a day as per requirement. But banks grants no interest on such accounts

iii) Saving Account- Saving account encourages small savings. But some restrictions are imposed on such accounts. In case of saving account, person can withdraw amount up to certain limits. Cheque facilities are provided on such accounts.

iv) Recurring Deposit Account- In such account, person deposits certain amount every month for certain years. This amount cannot be withdrawn before time except some special cases. Even interest is also credited in his account. The rate of interest is higher on this account.

2)      Advancing of Loans- After maintaining cash reserve ratio, bank gives the balance amount of deposits in the form of loans and credit. The types of loans and advances are

i) Cash Credit- Under this system, bank gives loans to the borrowers against security. The bank opens the account in the name of debtor and allows him to withdraw certain amount. Under this limit, debtor withdraws as well as deposit the amount as per his requirement. The interest is charged only on the amount withdrawn.

ii) Overdraft- This is the facility given by bank to his reliable customers. The bank allows customers to overdraw their accounts. The amount actually overdrawn is called as overdraft. Interest is charged only on the amount actually overdrawn. For example, a person has Rs.10000 in his accounts and bank provides overdraft facility to him. He withdraws Rs.15000 from his accounts. Then Rs.5000 is bank overdraft and interest will be charged on it.

iii) Demand Loans- Demand loan is a loan that can be called for complete repayment without any prior warning to the borrower. In other words, when the bank demands the money, the borrower must pay it.

iv) Short Term Loans- A loan scheduled to be repaid in less than a year is called as short term loan.

3)      Agency Functions-Commercial banks also act as agents of their customers. Some agency functions are discussed below:

i) Collection and Payment- Commercial Banks collect and make various payments for their clients by accepting cheques, bills, promissory notes etc. They also make payments of income tax, insurance premium etc. on behalf of their customers.

ii) Purchase and Sale of Securities- Commercial banks also undertake the function of purchase and sale of shares, bonds and various other securities on behalf of their customers.

iii) Trustee and Executor- These banks also preserve the Wills of the customers and act as trustee of the customer.

iv) Transfer of Funds- Commercial banks help its customers in transferring funds from one place to another through Bank Drafts. Banks charges certain amount of commission for rendering their services.

v) Purchase and Sale of Foreign Exchange- The purchase and sale of foreign exchange is increased with expansion of international trade. Trading of foreign currency is done by the commercial banks in India.

vi) Underwriter- Commercial banks also acts as underwriters for various companies issuing shares in the market. Under this function, bank pledges to buy all the unsold shares which are not purchased by the public in the market. Commercial banks charges fee for this work.

4)      General Utility Services- Commercial banks also render some general utility services.

i) Locker Facilities- Banks provides locker facility for safe custody of valuables and documents. Bank charge some fee for this facility from their customers.

ii)  Traveller’s Cheques and Letter of credit- Commercial Banks issue traveller’s cheques or letter of credit to the customer to avoid the danger of carrying money during travelling.

iii) Credit Cards- The facility of credit cards is provided by the commercial banks. Credit card holders are allowed to avail the credit facility.

iv) ATM Facility- Almost all commercial banks in India provide ATM (Automatic Teller Machine) facility to its customers. Customers can withdraw cash 24 hours a day.

5)      Social Functions- In recent times, banks also helps to achieve some socio- economic functions.

i) Capital Formation- Commercial bank accepts deposits from the public and invests them into production activities. Thus, idle savings of people are utilized and help to accelerate the rate of capital formation which in turn helps in economic development of the country.

ii) Employment- Commercial banks motivate people for self-employment by providing loan at low rate of interest. Employment and production increases with increase in self-employment which in turn is favorable condition for economic development.

iii)  Inducement to Innovation- Commercial banks motivates entrepreneur for innovation by providing credit facilities. Thus, new products are evolved through innovation.

iv) Contribution in Economic Development- Commercial banks provide loan to farmers at concessional rate of interest which increases agricultural products in the country. Capital formation, employment, innovations etc. are some contributions of commercial banks in economic development of the country.

v) Implementation of Monetary Policy- Commercial banks contract or expand credit as per the monetary policy formed by the central bank (RBI).

Structure of Commercial Banks

Scheduled Banks- The scheduled banks are those which are included in the Second Schedule of Reserve Bank of India Act, 1934. Scheduled banks are categorized into three categories-

1)      Public Sector Banks- Public Sector Banks are banks where a majority stake (i.e. more than 50%) is held by a government. There are three types of public sector banks.

  State Bank of India (SBI)- SBI was set up in 1955 when the Imperial Bank of India was taken over by the Government of India. Some princely state banks were made associate banks of SBI. These are –State Bank of Patiala

- State Bank of Mysore

- State Bank of Hyderabad

- State Bank of Indore

- State Bank of Bikaner and Jaipur

- State Bank of Saurashtra

- State bank of Travancore

Nationalized Banks- Bank Nationalization Day came into existence since 14 banks were nationalized by the government on 19 July, 1969. Currently there are 19 nationalized banks in India

- Allahabad Bank

- Andhra Bank

- Bank of Baroda

- Bank of India

- Bank of Maharashtra

- Canara Bank

- Central Bank of India

- Corporation Bank

- Dena Bank

- Indian Bank

- Indian Overseas Bank

- Oriental Bank of Commerce

- Punjab & Sind Bank

- Punjab National Bank

- United Commercial (UCO) Bank

- Union Bank of India

- United Bank of India

- Vijay Bank

Regional Rural Banks- On the recommendation of Mr. Narasimham in1975. Government set up regional rural banks. Regional Rural Banks are scheduled commercial banks operating at regional level in different parts of the country. The main objectives of these banks are to provide credit and other banking facilities in rural areas. Sarva Haryana Gramin Bank, Saurashtra Gramin Bank, Allahabad UP Gramin bank etc. are some regional rural banks.

2)      Private Sector Banks- After independence, government of India realized that private banks are not fulfilling the objective of economic development of the country. These banks were used by industrialists for their own development. Therefore, government nationalized these banks in 1969 and 1980. On recommendation of Narasimham Committee, the process of reforms in banking sector started in 1991. RBI (Reserve Bank of India) announced some guidelines for starting new private sector bank in 1993. The following banks were started in private sector

- UTI Bank Ltd.

- ICICI Bank Ltd.

- HDFC Bank Ltd.

- Indus Ind bank Ltd.

- Global Trust Bank Ltd.

- IDBI Bank Ltd.

- The Bank of Punjab Ltd.

3)      Foreign Banks- Foreign banks are those banks which are registered outside India. The globalization of Indian economy has encouraged the opening of foreign banks. Following are some foreign banks

- Bank of America

- DBS Bank

- HSBC India

- Standard Chartered Bank

- Citi Bank

Non-Scheduled Banks- Non- scheduled bank are those banks which are not included in the Second Schedule of Reserve bank of India Act, 1934. These banks have to maintain statutory cash reserve requirements but these banks not need to keep cash with RBI.