2 I Banking and Financial System

2 I Banking and Financial System seizure, by Charles I in 1640 of 130,000 bullion left for safe custody by the city merchants at the Royal Mint. As a result of this Royal repudiation, the merchants began to entrust their cashiers with large sums, but the later mis-appropriated their masters money for their own benefit. Finding that their employees had not treated them better than their king, the city merchants decided to keep their cash with goldsmiths, who in those days had strong rooms and employed watchmen.Thus, large sums of money were left with the goldsmiths for safe custody against their signed receipts, known as goldsmiths notes, embodying an undertaking to return the money to the depositor or to bearer on demand. Two developments were quickly followed, which were the foundation of issue and deposit banking, respectively:The first was that the goldsmiths note become payable to bearer, and so was transformed 1 from a receipt to a bank note. it was payable on demand, and enjoyed considerable circulation. Secondly, the goldsmiths gradually discovered that large sums of money were left in their keeping for long periods and, following the example of Dutch bankers, they thought it safe and profitable to lend out a part of their customers money provided such loans were - rapid within a fixed time. Further, the business of loaning of other peoples money at interest was profitable, and in order to attract larger amount of funds, the goldsmiths began to offer interest on money which was deposited with them, instead of charging a fee for their services in safe guardmg their clients go1d This is an important step in the development of banking in England. Business grew to such an extent that it soon became clear that a goldsmith could always spare a certain proportion of his cash for loans, regardless of the date at which his notes fell due. It equally became safe for him to make his notes payable at any time, for so long as his credit remained good, he could calculate, on the law of average, the amount of gold he needed to meet the daily claims of his note holders and depositors.In 1672, the development of English banking received a rude setback. Charles II borrowed heavily from the goldsmiths and promptly like his father repudiated his debts. A crisis ensued, and was followed by a general suspension of payments. Confidence; however, was restored in spite of the shock and the general belief, which it produced among people that the goldsmiths were guilty of imprudence and exorbitant practices. It was soon after this date that the goldsmiths; found that they could receive money on what is now termed current acCol4nt,.GROWTH OF JOINT STOCK BANKS IN INDIAThe origin of modern banking in India started from 1770 when the first joint-stock bank, named the Hindustan Bank, was started by the English Agency house of Alexander & Co, in Calcutta. The bank was, however, would up in 1832.PRESIDENCY BANKSThe real growth of modern commercial banking starts in the country when the government was awakened to the need for banks in 1806 with the establishment of the first presidency Bank, called the Bank of Bengal, in Calcutta in that year. And then the establishment of other 2 Presidency Banks, namely, the Bank of Bombay (1840) and the Bank of Madras ( 1843). From each of these banks, the government had subscribed Rs. 3 lakes of its share capital. However, a majority part of their share capital was contributed by European shareholders.These banks however, enjoyed the monopoly of government banking. They were also given the right of issuing currency notes in the year 1823, which was withdrawn in 1862.These three Presidency Banks were continued their operations in our country till 1920. In 1921 they were amalgamated into the Imperial Bank of India (Now called as State Bank of India).INDIAN JOINTSTOCK BANKSIn the year 1860 is a milestone in the history of public sector banks in India, from that year onwards the principle of limited liability was first applied to join-stock banks. From 1860 till at the end of 19th century, a number of Indian joint stock banks come into existence. The list of joint stock banks and their year of establishment was given as follows 1865 Allahabad Bank was started at Allahabad 1875 - Alliance Bank of Simla 1889 - Oudh Commercial Bank 1895 - Punjab National Bank came into existenceInspired by the Swadeshi Movement, several Indian entrepreneurs ventured into the modem banking business. During the period of 1906 to 1913, thus, there was a mushroom growth of banks. Many banks are also came into existence during this period. That are Bank of India (1906), Canara Bank (1906), Bank of Baroda (1908) and Central Bank of India (1911).FOREIGN BANKSIn addition to the Indian joint-stock banks, more number of foreign banks called exchange banks, with their head offices in their home countries, entered in to the banking system of India. The establishment of Exchange banks mainly for financing the foreign trade, but also they have done banking activity and competing with Indian banks. The exchange banks are termed foreign banks, because they were financed and managed by non-Indians. Causes of Crisis in Indian Banking SystemIn the middle of 20th century, all the Indian joint-stock banks had a checkered career in the country. The banking sector experience severe set-backs during the period from 1913 to 1917. 108 banks were failed and another 373 banks were failed in the year between 1922 and 1936 and further 620 more banks were failed during the year 1937and 1938.

4 [Banking and Financial System As per the findings of the Central Banking Enquiry Committee (1929), the following reasons are the majOr causes of bank failure in India, that are given as follows: In efficient management Insufficient Capital and reserves Poor liquidity of assets In effective Credit policy Creation of long-term loans on the basis of short-term deposits Improper in speculative investment Unnecessary and meaningless Competition among joint stock banks Lack of response from the public towards banking business Lack of co-ordination among joint-stock banks Lack of suitable banking legislation for regulation of banks Combination of non-banking activities with banking Favoritism by the directors Inexperienced and Inefficient directors In addition to all the above reasons, lack of public confidence on banks may also be accounted for the failure of more Indian commercial banks. More over the other event of bank failures took place in 1946-47. At the time of Independence , India had an extremely weak banking structure, which consist 544 small non-scheduled banks and 96 scheduled banks, giving bulk finance to the trading sector. Out of all these banks , only few of them possessed on all-India character, while most of them had limited geographical coverage in their business.Banking developments in India (After independence)After independence, in 1951, the economic planning was introduced by Government of India in our country. For the last 37 years of the planning era, commercial banking has undergone enormous transformation through different important developments, reforms and policy measures which was introduced by our Indian government.Some of the important Changes were made in the Indian banking system and that are enlisted as follows: New strategies were adopted and implemented in banking business. Nationalization of Public sector banks Structural changes of commercial banking Nationalization of RBI Formation and amendment of Banking regulation Reducing the importance of foreign banks Amalgamations (Merger) and Winding up (Liquidation) of banks MEANING AND FUNCTIONS OF BANK Meaning of Bank: A bank is an institution which deals with money and credit. It accepts deposits from the public , makes the funds available to those who need them

Commercial Banking /5 and helps in the remittance of money from one place to another. Some of the definitions given by the experts given as follow to understand the clear meaning of the bank.1. According to Prof. Sayers, A bank is an institution whose debts are widely accepted in settlement of other peoples debts to each other. In this definition Sayers has emphasized the transactions from debts which are raised by a financial institution. 2. According to Sir John Paget, No person or body corporate or otherwise, can be a banker who does not (i) take deposit, accounts, (ii) take current accounts, (iii) issue and pay cheques, and (iv) collects cheques, crossed and uncrossed, for his customers. 3. According to Kinley, a 1ank is an establishment which makes to individuals such advances of money as may be required and safely made, and to which individuals entrust money when not required by them for use 4. According to Crowther, a bank collects money from those who have it to spare or sho are saving it out of their incomes, and it lends this money to those who require it. Meaning of Banking Company: According to the Indian Banking Company Act 1949, A banking company means any company which transacts the business of banking Banking means accepting for the purpose of lending of investment of deposits of money from the public, payable on demand or other wise and withdraw able by cheque, draft or otherwise. Meaning of Commercial Banks : Commercial bank is a type of financial intermediately and it is the type of bank. It is also known as business banking. It is a bank that provides checking accounts, savings accounts, and money market accounts and that accepts time deposits. The teim Commercial bank refers to a bank or a division of a bank primarily dealing with deposits and loans from corporations or large businesses. In some other jurisdictions, the strict separation of investment and commercial banking not applied. Commercial banking may also be seen as distinct from retail banking, which involves the provision of financial servIces direct to consumers. Many banks offer both commercial and retail banking services. Commercial banks also allow a- variety of deposit accounts, such as savings, and time deposit. Their main objective is to make profit . While commercial banks offer their services to individuals or customers, they are primarily concerned with receiving deposits and giving loans and advances to the businesses. The primary difference between a commercial bank and its counterpart is that a commercial bank earns revenue by issuing primary loans from-its deposits while an investment bank brings debt and equity offerings to market for a fee. Among its assets, including loans, a commercial bank holds a portfolio of other securities to generate proprietary income. PRIMARY FUNCTIONS OF COMMERCIAL BANK Commercial banks plays a vital role in the banking system, its primary functions are given- as fallows: -

(A) TYPES OF DEPOSITS Formally banks in India have five types of deposit accounts, namely Saving Banking Accounts, Current Accounts, Recurring Deposits Accounts, Fixed Deposits and Home Safe Account. In recent years, due to competition, few banks have introduced new products, which combine the features of above two or more deposits. These are known by different names in different banks, e.g 2-in-i deposits, Smart .Deposits, Power Saving Deposits, and Automatic Sweep Deposits etc. 1. Savings Deposit Accounts The main objective of this kind of account is to create saving habitsamong the people. These type deposits accounts are one of the most popular type of deposits for individual accounts. These accounts nt only provide cheque facility but also have lot of flexibility for deposits and withdrawal of funds from the account. Most of the banks have rules for the maximum number of withdrawals in a period and the maximum amount of withdrawal, but hardly any bank enforces these. However, banks have all the rights to carry out or bring out such restrictions if it is felt that the account is being misused as a current account. The interest on these accounts at present is regulated by Reserve Bank of India. Now all Indian Banks are offering 3.5% p.a. interest rate on such deposits. 2. Current Deposit Accounts The name of this account is demand deposit account. These kind of account is meant for businessmen and are not for money savers and not generally used for the purpose of investment. These deposits are the liquid deposits and there are no restrictions for more number of withdrawals or the amount of transactions in a day. Most of the current account is company accounts. Cheque book facility is also available in this kind of account and account holder can deposit all types of cheques and drafts in their name or endorsed it in their favor by third parties. Interest wifi not be paid by the banks on the deposits of these accounts. On the other hand, banks will charge service charges on such accounts. In this kind of account customer is liable to pay interest for his excess withdrawal. 3. Recurring Deposit Accounts These kind of deposit accounts are more suitable for the people who do not have lump sum amount of savings, but the people are ready and allowed to save a small amount each and every month. Such type of deposits will get interest on the amount already deposited and at the same rates as are applicable for Fixed Deposits or Term Deposits. If the people who wish to create a saving for their childrens education / marriage of their daughter / to buy a car without loans then they can prefer this kind account. Under this system/type of deposits, the person has to deposit a fixed amount of money each and every month. Any default in the payment of installments within that month attracts a penalty. Some banks offering a fixed installment Recurring Deposit and flexible / variable RD. Under these flexible Recurring deposits, the people are allowed to deposit higher amount of installments, with a

Commercial Banking! 7 maximum limit of 10 times of the minimum amount agreed upon. Such accounts are normally allowed to be matured from 6 months to 120 months. The deposit details will be entered in the Pass book with the prescribed amount of interest. Premature withdrawals are usually allowed but some penalty wifi be imposed for their premature withdrawals. The customers may open this account in single or joint names and they can nominate their legal hirer also. 4. Term Deposit or Fixed Deposit Accounts Banks offer fixed deposits for the periods from 7 days to 10 years. The term Fixed Deposits (FD) connected to the period of maturity or tenure. The amount in fixed deposit account can not be withdrawn before the maturity date. The amount has to be kept in bank for a certain period or for a long period. In case any need may arise then the depositor can ask for closing or they can surrender their account by giving request to the bank authorities to his/her FD account by paying a penalty for their prematute withdrawals. Usually the banks will charge 1% penalty for premature withdrawals, on the other hand some banks do not charge any penalty for such kind of activity. The rate of iterst in such deposits will differ with the conditions of the market rates .i.e. it will go up if market interest rates go up and it wifi fall down if the market rates fall. The rate of interest for Fixed Deposits differs from bank to bank, unlike previously when the same were regulated by RBI and all banks should have the same interest rate structure. Now private sector banks and foreign banks give high rate of interest. Generally a bank FD is paid in lump sum on the date of maturity. Some banks shall pay interest at the end of each quarter of the year. If any one desires to get interest, to be paid every month, then the interest paid will be at a discounted rate. The Interest payable on Fixed Deposit can also be shifted to SB account or Current Account of the customer. 5. Home Safe account Under this kind of account a safe is supplied to the depositor to keep it at home and to put his savings in it. Periodically the safe wifi be taken to the bank where the amount ofsafe is credited to his account. .. (B.) TYPES OF LOANS . The second important function of a commercial bank is advancing loans to the public. After keeping certain amount of reserves, the bank may lend their deposits to the needy borrowers If the borrowers are able to satisfy the routine formalities of the bank then the bank will sanction the loan to the people who are in need of it. The various kinds of loans given by them are discussed as follows: The loans and advances made by the commercial banks are of various forms, like Cash credit, Overdraft, demand loan, hire purchase loan, etc. Cash credit means that the loan given by a commercial bank in installments against the security of raw materials, produced goods, etc.

Overdraft is made on security against stock and shares, insurance policies, etc., under current account. Demand loan is paid in full to the debtor at a time. Hire purchase loans are made to all persons for the purchase of customer durable goods like radio, bicycle, tailoring machine, sites for buildings etc and these loans are repayable to the bank in easy installments with interest due thereon.In General, the types of loans granted by the banks are classified into the following ways that are: 1. Secured loan A Secured loan is a loan in which the borrower pledges some asset (e.g., a vehicle or property document) as collateral security for the loan. 2. Mortgage loan A mortgage loan is a very common type of debt instrument, used to purchase real estate. Commercial banks, however, are given security as a lien on the title to the house until the mortgage is paid full. If the borrower defaults on the loan, the bank wifi have the right to retain the property or a house and sell it to recover their loan amount. As their name implies, such financial institutions secured their earning primarily from commercial and consumer loans and left the major task of home financing to others. However, due to changes in banking laws and policies, commercial banks are increasingly active in home financing. Some of the banks maintain active and well-organized and planned departments whose primary function is to compete actively for real estate loans. In areas lacking specialized real estate financial institutions, these banks become the source for residential and farm mortgage loans. More over, the banks acquire mortgages by simply purchasing them from mortgage bankers or dealers. In addition, dealer service companies, which were originally used to obtain car loans for permanent lenders such as commercial banks, wanted to broaden their activity beyond their local area. In recent years, however, such companies have concentrsted on acquiring mobile home loans in volume for both commercial banks and savings and loan associations. Service companies obtain these loans from retail dealers, usually on a non recourse basis. Almost all bank/service company agreements contain a credit insurance policy that protects the lender if the consumer defaults. 3. Unsecured loan Unsecured loans are monetary loans that are not secured against the borrowers assets (i.e., no collateral is involved).

Dadra & Nagar Haveli 24 2,25,615 776,39 5,072 140,70 Daman & Diu 18 2,27,342 1255,60 4,414 242,20 SOUTHERN REGON 22,974 1864,80,422 861318,78 392,00,362 757460,34 Andhra Pradesh 6,635 602,10,893 218350,10 120,13,970 210384,80 Karnataka 5,950 438,83,664 256451,59 84,69,354 198203,96 Kerala 4,170 289,56,258 135119,23 57,02,986 80713,83 Tamil Nadu o,i80 521,99,658 245457,88 128,03,893 265325,30 Lakshadweep 11 43,430 479,54 4,641 25,83 Puducherry 128 11,86,519 5460,45 2,05,518 2806,62 ALL-INDIA 81,802 6623,02,403 3921980,82 1100,56,177 2847713,12 COMMERCIAL BANKS IN INDIA Commercial Banks in India are broadly categorized into Scheduled Commercial Banks and Nonscheduled Commercial Banks. The banks which are comes under the second Scheduled of the Reserve Bank of India Act, 1934 is called Scheduled commercial bank. The selection measure for listing a bank under the Second Schedule was provided in section 42 (6) of the Reserve Bank of India Act, 1934. The modem Commercial Banks in India cater to the financial needs of different sectors.

THE MAIN FUNCTIONS OF MODERN COMMERCIAL BANKS COMPRISE OF ThE FOLLOWING KEY ASPECTS: Accepting deposits Giving advances by overdraft and installment loan, or other means for the formation and establishment of industries, Purchase of Land, Houses and other properties, equipments, and for the purpose of Capital investment etc. Transfer of funds Issuing bankers draft and bank cheques Providing letter of credit, guarantees, underwriting securities like shares, bonds and debentures. Providing safety lockers to keep documents and other items Sale, distribution or brokerage of insurance, unit trusts and similar financial products like a financial supermarket Management of Cash and treasury services Merchant banking and private finance And it deals with interest rates, and credit-related securities. Its acting as trustee In a financial markets of India, the financial companies are attracted towards them to act as trustees to take the responsibility of the security for the financial instrument like a debenture. The Indian Government presently hires the commercial banks for different purposes like collection of tax and refund of taxes, payment of pensions to the retired people etc. Getting payments by way of telegraphic transfer, Electronic fund transfer , internet banking, or other meansIn addition to above, Commercial bank acts as a financial institution which performs various types of functions. It satisfies the financial needs of the different sectors such as agriculture, industry, trade, communication, etc. it means they play very important key role in a process of economic development and social needs. Traditionally the functions of commercial banks are sub divided into two categories viz, primary functions and. the secondary functions. The following chart simplifies the functions of banks. FUNCTIONS OF COMMERCIAL BANKS

A. PRIMARY FUNCTIONS OF COMMERCIAL BANKS Commercial Banks performs various primary functions some of them are given below: 1. Acceptance of Deposits: Commercial bank accepts various types of deposits from public especially from its clients. It includes saving account deposits, recurring account deposits, fixed deposits, etc. These deposits are payable after a certain time period. 2. Advancing Loans : The commercial banks provide loans and advances of various forms. It includes an over draft facility, cash credit, bill discounting, etc. Tney also give demand and demand and term loans to all types of clients against proper security. 3. Creation of Credit: It is most significant function of the commercial banks. While sanctioning a loan to a customer, a bank does not provide cash to the borrower Instead it opens a deposit account from where the borrower can withdraw. In other words while sanctioning a loan a bank automatically creates deposits. This is known as a credit creation from commercial bank. B. SECONDARY FUNCTIONS OF COMMERCIAL BANKS Along with the primary functions each commercial bank has to perform several secondary functions too. It includes many agency functions or general utility functions. The secondary functions of commercial banks can be divided into agency functions and utility functions. I. Agency Functions Some o the agency functions of commercial banks are given as follows:

A. Primary Functions B. Secondary functions

1. Acceptance of Deposits 1. Cheque Clearance facility

2. Advancing Loans 2. Purchase and Sale of Securities

3. Credit Creation 3. 4. 5. 6. 7. Remittance / transfer of money Acting as a Trustee Acting as a Representative Acceptance and giving money Letter of credit

12/Banking and Financial System

To help their customers in transferring funds from one place to another through cheques, drafts etc. To collect and clear cheque, dividends and interest warrant. To make payment of rent, insurance premium, etc. To deal in foreign exchange transactions. To purchase and sell securities. To act as trusty, attorney, correspondent and executor. To accept tax proceeds and tax returns. To execute the standing instructions of the customers based on their request. II. General Utility Functions In addition to the agency services the modern commercial banks provide many general utility services , that are given as follows: Providing Safety locker facility to customers Money transfer facility to the customers Issuing travelers cheques Acting as a referee Helping in Collection of statistical datas relating to the industry, trade and commerce ,money banking. Underwriting securities of different componies Giving Gift cheque facility Accepting various bills for payment e.g phone bills, gas bills, water bifis, etc. Merchant banking facility. Providing various cards such as credit cards, debit cards, Smart cards, etc. TABLE 2 : LIST OF COMMERCIAL BANKS IN INDIA

1. State Bank of India 2. State Bank of Mysore 3. State Bank of Patiala 4. State Bank of Travancore 5. State Bank of Bikaner & Jaipur 6. State Bank of Hyderabad 7. State Bank of Indore

1. Oriental Bank of Commerce 2. Punjab & Sind Bank 3. Punjab National Bank 4. Syndicate Bank 5. UCO Bank 6. Union Bank of India 7. United Bank of India 8. Vijaya Bank 9. Allahabad Bank 1O.Andhra Bank 11.Bank of Baroda 12.Bank of India 13.Bank of Maharashtra 14.Canara Bank 15.Central Bank of India

1. Barclays Bank 2. BNP Paribas 3. Calyon Bank 4. C h i n a t r u s t Commercial Bank 5. Citibank 6. PBS Bank 7. Deutsche Bk 8.Hongkon & Shanghai Banking Corporation 9. JP Morgan Chase Bank 1O.UBS AG 11.ABN Amro Bank 12.Abu Dhabi Commercial Bank

1. SBI Commercial & International Bank 2. South Indian Bank 3. Tamilnad Mercantile Bank 4. Yes Bank 5. Federal Bank 6. HDFC Bank 7. ICICI Bank 8. Induslnd Bank 9. ING Vysya Bank 1O.Jammu & Kashmir Bank 11.Karnataka Bank 12.Karur Vysya Bank 13.Kjtak Mahindra Bank 14.Lakshmi Vilas Bank

SBI & Associates Nationalized Banks Foreign Banks Other Scheduled

Commercial Banks

Commercial Banking 113 16.Corporation Bank 13.American Express 15.Nainital Bank 17.Dena Bank B a n k I n g 16.Axis Bank 18.IDBI Bank Ltd. Corporation 17.Bank of Rajasthan 19.Indian Bank 14.Antwerp Diamond 18.Catholic Syrian Bank 20.Indian Overseas Bank Bank 19.City Union Bank 15.AB Bank 20.Development Credit 16.Bank International Bank Indonesia 21.Dhanaiakshnii Bank 17.Bank of America 22.Ratnakar Bank 18.Bank of Bahrain & Kuwait 19.Bank of Ceylon 20.Bank of Nova Scotia 21.Bank of Tokyo Mitsubishi UFJ 22.JSC VTB Bank 23.Krurtg Thai Bank 24.Mashreq Bank 25.Mizuho Corporate Bank 26.Oman International Bank 27.Shinhan Bank 28.Societe Generale Sonali Bank 29.Standard Chartered Bank 30.State Bank of Mauritius

ROLE OF COMMERCIAL BANKS IN INDIAN ECONOMIC DEVELOPMENT Commercial banks play a vital role in the development of country. It is true to state that without the development of commercial banking, underdeveloped countries cannot have any hope to join with advanced countries. Industrial development requires the adequate and enough capital which will not possible without the existence of effective banking system to provide necessary funds to acquire capital. In addition to it, industrial development is impossible without the existence of markets to clear of the goods produced. But how can be the markets extended without the services of banks? In this chapter, we could deal with the services provided by Commercial banks and how banks are playing a significant role in the economic development in India. (a) Necessity of Banks for trade and industry The entire economic progress based on extensive trade and industrialization, which could not be possible without enough and adequate level of money. But money does not mean coins and currency notes, only since these form only a small proportion of the total volume of money supply. It is the bank deposits on which cheques can be issued that constitute the important sources of money. In large transactions, usually payments are not made in terms of money but in terms of cheques and drafts. Between countries, trade is financed through bills so exchange which are discounted by banks. Without the use of the bank cheque, the bank draft and the bill of exchange, internal trade and international trade could not be developed, and without such kind of trade, industrial development could not be possible. (b) It helps in distribution of funds : Commercial banks encourage production and enhance national income by the transference of surplus capital from regions where it is not required much, to those regions where it can be more usefully and efficiently employed. This distribution of funds between the regions has the effect of opening up backward regions and paying the way for their economic development. (c) Banks create credit and it helps in diversifying business : Fluctuations in bank credit have an important bearing on the level of economic activity. Expansion of bank credit will provide more funds to entrepreneurs and it will lead to more investment. Under the conditions of full employment, expansion of bank credit will have the effect of inflationary pressure. But under conditions of unemployment, it will push up production in the country. On the other hand, a decrease in bank credit will result in decrease in production, employment, sales and prices. With the view of an under developed economy, the expansion of bank credit will offer more financial resources to the industries and it will be the causes for greater economic development. (d) Supervision of debt: An important services that are the banks renders to the community is the creation of demand deposits in exchange of debts of other. Commercial banks buy debts of others which are not generally acceptable as money, either because the debtors are not sufficiently known or because their debt is payable only after a period of time. In return for them, they issue demand deposits which are generally accepted as money. By these exchange operations, banks monetize debt. The significance of banks today flows from the fact that they are not merely traders in mofley but also, in an important sense, manufacturers of money. Bank money is used for the promotion of industry and trade. It is rightly said that they have not only the power to determine the aggregate volume of bank money in existence but to influence the uses to which that money should be put. (e) Capital formation : Commercial banks creates saving habit among thepeople. They mobilize idle and dormant capital of the conununity and make it available for productive purposes. Economic development depends upon the channelisation of economic resources from consumption to capital formation. A higher rate of saving and investment is, therefore, what constitutes real capital formation. So the role of commercial banks are invaluable. But there can be other institutions also in a country such as insurance companies which may help in mobilizing the savings of the different community for productive purposes. (f) Variations in interest rates : Banks can influence the rate of interest in the money market through its supply of funds. By offering more or less funds, it can exert a powerful influence upon interest rates. More over, it can also influence the people to hold more or less bank money or less or more other assets. In this way, too, it can influence the interest rates. A cheap money policy with low rate of interest will tend to stimulate economic activity, if other conditions are favourable.

Commercial Banking? 15 In a developing country like India, banking facilities are highly essential and inadequate. In India , Most of the people living in vifiages and towns and they do not have banking facilities and all their savings are wasted. Opening banks in these areas or extension of banking facilities surely help them to mobilize more savings in these areas and, when put in the hands of entrepreneurs, will become more productive. In India / commercial banks have started their new functions and that will help all categories of people and business. It also helps in granting deferred payments, agreements between Indian industrial units and foreign companies to enable the indian industrial units to import machinery and other essential items. Thus, baks are came to existance to occupy an important place in the industrial and commercial life of india. A developed banking system is always necessary for the industrial and other sectoral development TYPES OF BANKS Banks are classified into different types , based on their functions , ownership , domicile etc. that are (I) CLASSIFICATION BASED ON FUNCTION (i) Commercial Banks Commercial banks are financial institutions which will finance trade , commerce and industry with short term loans. They also lend money to the businessmen and traders but only for short periods and (t wont encourage medium term and long term lending. But now commercial banks have also extended their areas of operation to the medium and long term finance. Most of the Joint Stock banks in India, are commercial banks, e.g. Corporation bank Indian Bank, Punjab National Bank. (ii) Industrial and Investment Banks Industrial banks, also known as investment banks, mainly meet the medium term and long term financial needs of the industries. These are the banks which gives long term loans to industries. The main functions of industrial banks are: (a) Organize and undertake the sale of new issues of shares and debentures of different companies (b) Its act as a bridge between capital savers and industrialists, so its called as a entrepreneur of entrepreneur. In India , Industrial Credit and Investment Corporation of India (ICICI 1955) , Industrial finance corporation of India (IFCI - 1948) and Industrial Development bank of India (IDBI 1964) are playing a significant role in the development of industries. (iii) Agricultural Development Banks Its activities usually differ from industrial and commercial bank. Industrial and commercial banks do not deal with the agricultural finance. Normally agricultural banks are giving both short term and long term loan to the agriculturists in both ways either Direct or

16/Banking and Financial System Indirect loans. The short term agricultural loans are usually given for the purpose of purchase of seeds , fertilizers etc. Long term loans are given by them for the purpose of making permanent development of the agriculturist land , purchase of land, purchase of machineries related to the agricultural activity. E.g. NABARD , Central Co-operative Banks (CCBs), State Co-operative Banks (SCBs). (iv) ExchangE Banks Exchange banks deals with foreign exchange and in foreign trade. They act as a businessmen in buying and selling foreign currencies or claims to foreign exchange. Exchange bank is a commercial bank, it is accepting defosits and lend money. Its grants direct loans to the importers and exporters. In India some of the banks are authorized to act as a dealers in foreign exchange. In India , SBI and other foreign banks are doing foreign exchange business. Its always involving in promoting foreign trade.Commercial banks which specialize in financing international trade (import and export trade) and dealing in foreign money are known as exchange banks. The exchange banks operating in India are foreign owned with head offices in foreign countries. The exchange banks provide foreign currencies to persons who are engaged in import and export trade, e.g., the commercial Bank, City Bank, Standard charted, The Grid lays Bank etc. (v) International Banks These banks are financial institutions specially created to deal with international financial relations. The most important international banks of to-day are International Monetary Fund(IMF), International Bank for Reconstruction and Development (IBRD) known as the World Bank and the International Development Association (IDA). IMF established to provide short term loans to overcome the difficulties in balance of payments, but World Bank providing long term loans mainly for th purpose of restructuring war damaged economics. ( Example restructure of war damages in Afganistan and Errak) , developing the less developed economies. (vi) Central Banks Central bank is the apex institution which regulates , controls and supervise the entire monitory and credit system of our country . The important functions of Central banks are: It has the monopoly rights for Issuing currency notes and it acts as a bankers bank, governments bank, Custodian of foreign exchange reserve. It is the lender of the last resort. It act as the banker, agent and financial adviser to the state. Its functioning with settlement and transfer and as a board of central clearance, Indias central bank i.e. RBI. In most of the countries having its Central bank. They are known by different name in different countries, e.g. The Reserve Bank of India. The Federal Reserve (U.S.A.), The Bank of England (U.K.), The Bank of France (France), Riks of Sweeden

Commercial Banking! 17 (vii) Schedule and Non Scheduled Banks The banks which are included in the 2 schedule of Reserve Bank on Indias Act 1934 is called as Scheduled Bank If it is not in 2d Schedule of RBI Act then its called as non - scheduled bank. (viii) Land Mortgage Banks: - These banks lend money on the security of land to the agriculturist for a long period, usually 20 or 25 years. They secure funds by the sale of debentures usually with the government guarantee and assistance. CLASSIFICATION BASED ON OWNERSHIP (1) Co-operative Banks India is a developing country and more than 60 percentage of its people are in agricultural business. Now the State and Central govern taking lot of steps to bring them out from the existing financial position. In spite of various steps that have been taken by the government still there is a straggle in their financial level and not enough improvement in their level of illiteracy. Earlier it was so high in the rural areas. So the formers are facing lot of difficulty in getting loans. So there was a only one option available for them to get a loan to execute their agricultural activity i.e. Money lenders and indigenous bankers. In the earlier days, usually both of them charged high rate of interest to lend money to the formers. In order to protect the formers from money lenders and indigenous bankers, the cooperative movement was forced to be started and it was began with passing of the credit societies act 1904. The act given to form credit societies and to facifitate rural credit. Unlimited liability is the rule of credit societies . Co operative societies slowly gives its way to the cooperative banks. These are small banks organized on co-operative principles with a view to give short and medium term loans mainly to agriculturists and artisans like Weavers and Spinners. In India credit institutions organised under co operative societies law and playing an important role in agricultural credit. The special feature of the co operative banks is federal structure or three tier system i.e. the operations /activities starts from village level to natiohal level. Cooperative banking can be divided in to two areas , namely agricultural and non agricultural co operative banks. Agricultural co operative banks are primary cooperative banks i.e. village level or district level Co operative banks ( Example : CCB Central Co operative Banks , SCB State Co operative Banks). Non agricultural Co operative banks are Urban Co - operative banks, Employee credit cooperative banks and housing co operative banks. (ii) Public Sector Banks These are the banks owned and controlled by the government. Public sector banks includes Regional Rural Banks (RRB ) , SBI (formally called as Imperial Bank ) and its associated bapjcs ( 1 + 7 = 8 Banks ) , Nationalised banks (19 Banks ). Thus we have 27 public

18! Banking and Financial System sector banks in Indian Commercial Banking. (iii) Private Sector Banks The banks which are comes under the control of private ownership and not owned by the government or co operative societies called private banks. As per the Reserve Bank of Indias regulation, the new banks are required to be registered as a public limited companies under the companies act 1956, with the initial paid up capital of Rs. 100 crore. They are governed by the regulations of RBI Act and Banking Regulation Act 1949 and they should comply with the RBI directions. At present we have 10 old private banks and 20 new private banks in India. CLASSIFICATION BASED ON DOMICILE (i) Domestic Banks If the banks registered and incorporated with in the country that its called Domestic