commercial banks1

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Commercial Banks

Meant for providing short-term credit to trade

and industry. They are now providing credit to

agriculture, SSIs and other neglected sections

of the economy.



Scheduled Banks and Non- scheduled

banks Scheduled banks are those whose names are

included in the 2nd schedule to the RBI Act.

As per under sec 42(6) of the RBI Act, a banking

institution can claim for its name to be includedin the schedule, if

- It satisfies RBI that its affairs are not beingconducted in a manner detrimental to the

interests of its depositors

- Its paid up capital and reserves have an aggregatevalue of not less than Rs.200 Crores.



Benefits available for scheduled banks

Refinancing of loans

Rediscounting of bills

Maintenance of accounts by RBI Remittance facilities between different

branches through RBI

(they are required to maintain statutoryreserve with RBI)



Licensed banks and non licensed banks

As per the banking regulation Act 1949, every

banking company wanting to commence

business after enactment of this act, has to

obtain a license from RBI.



Functions of commercial banks

Primary functions

Secondary functions



Primary functions/services

Accepting deposits

- Savings deposits

- Fixed/term deposits- Current deposits



Lending of money

- Loan(secured or unsecured)

- Cash credit(with security)- Overdraft(without security)

- Discounting and purchasing of bills



Secondary functions

Agency service

- Collection of drafts, bills, cheques, divident etc.on behalf of customers

- Execution of the standing orders of the cusomers.Eg. Rent, bills etc

- Conducting stock exchange transactions

- Acting as a correspondent or representative of customers, and other banks

- Functioning as an executor of a customer



General utility service

- LoC

- Travellers cheque- Accepting valuables for safe custody

- Acting as a referee for the customers

- Advisory services

- Issue of credit cards

- Providing information through bullettins



Commercial banking principles

Profitability

Liquidity

Safety

Social good



Sources of commercial banks funds

Capital; represents

- Nationalised banks: capital owned by central

govt- Foreign banks: amount brought by bank by

way of start up capital

- Other banks: amount contributed byshareholders of the bank



Reserves and surplus

- Statutory reserve

- Capital reserve- Share premium

- Revenue and other reserves



Deposits: constitutes 80% of a commercial banksfunds

Borrowings

Other liabilities

- Bills payable(eg.bank draft)

- Interest accrued

- Inter office adjustments- Others(proposed dividend, surplus provision for

bad debts, staff security etc)



Merits and demerits of deposits,

borrowings and refinancing as a

source of funds Current deposit

Savings deposit

Fixed deposit

Borrowings

Refinancing from financial institutions



Balance with other banks

Money at call and short notice

Investments(Investment in securities)

Advances (more than 50% of the funds are

used and it contributes to more than 80% of

the income) Fixed assets

Contingent liabilities



Classification of banking institutions

Apex banking institutions

- IDBI

- NABARD- EXIM BANK

- IRBI

- NHB



Development banks

- All India level development

banks(IFCI,ICICI,SIDBI)

- State level development banks

(SFCs,SIDCs, etc.)



Credit guarantee institutions

Export Credit & Guarantee Corporation of

India

Deposit Insurance and CreditG

uaranteeCorporation of India



Money Market institutions

Discount and Finance House of India Ltd

Stock Holding Corporation of India Ltd

Securities Trading Corporation of India Ltd



Credit rating institutions

Credit Rating Information & Services of India

Ltd

Investment Information and Credit RatingAgency of India

Credit Analysis and Research Ltd



Clearing House System

An organisation of banks constituted for the

purpose of settling inter-bank liabilities due to

transfer of deposits by a customer of a

particular bank to that of another bank.



Mechanism

Every bank of the locality prepares a bank-wise list of cheques received from customers and drawn on differentbanks

An official of each bank visits clearing house with the

cheques in the morning. He delivers it to the officials of respective banks. He also receives cheques drawn on hisbank from the officials of other banks.

Officials return to their banks to meet again in theafternoon to return any dishonoured instruments.

The official of each bank computes the final balancepayable or receivable

The final settlement is effected by the supervisor of theclearing house by debiting or crediting.

commercial banks1

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