"Commercial Banking"

*  Introduction :-

                               A bank is a financial institution, which deals with the deposits and advances and other related services. It receives money from those who want to save it in the form of deposits and it lends money to those who need it.

*  Definition :-

                       The Banking Companies Act, 1949 defines a banking company as “a company which transacts the business of banking in any state of India, and the word banking has been defined as accepting for the purpose of lending or investment of deposits of money from the public repayable on demand or otherwise, and withdrawable by Cheque, draft, order or otherwise.”

*  Objectives :-

• To understand the concept and working of commercial banks.
• To understand the functioning of commercial banks in terms of their objectives and to see their exercise in balancing their liquidity and profitability objectives.
• To understand the progress of commercial banks in India since 1991.

*  Functions of Commercial Banking :-

 

There are mainly two Functions of Commercial Banks

1) Primary Function &

2) Secondary Function

     1) Primary Function :-

A) Accepting Deposits :-

                          A Bank accepts deposits from individuals, firms and institutions. These deposits are the main sources of finance / revenue of a bank. The deposits received by bank can be as follows:

i) Saving Bank Deposits :-

                                Savings Bank Deposits are generally kept by salaried persons having fixed income. These accounts can be opened with a small amount. These deposits carry a lower rate of interest than fixed deposits.

ii) Current Account Deposits :-

                                Demand Deposits are generally kept by businessmen, to meet their day-to-day business needs. Money deposited in the current account can be withdrawn in part or full any time. No interest is paid on these accounts. The banks keep almost 100% reserve against these deposits.

iii) Fixed Deposits :-

                           Fixed Deposits are deposits, which are made for fixed period of time which varies from 15 days to 5 years or more. These Deposits carry a high rate of interest. These deposits cannot be normally withdrawn before the expiry of period. If they are withdrawn there will be a loss of interest. At present the rate of interest varies from 5% to 8.5% depending on the time period and the type of bank.

iv) Recurring Deposits :-

                                      In case of such deposits, depositors are encouraged to deposit a specified amount at a regular interval i.e. monthly basis. Interest on these deposits is almost equal to that of Fixed Deposits.

B) Giving Loan :-

                              Banks provide loans to its customers for short and medium- terms. On these loans, the banks charge interest. Banks pay lower rate of interest for the deposits accepted and give loans at a higher rate of interest. The difference between the lending rate and deposit rate is the profit of the bank. But since the bank deals in people’s money, it has to keep some cash ready to meet the withdrawals of the depositors.

i) Overdraft Facilities :-

                         This facility is given to current account holders. Under such facility, the customer is allowed to withdraw excess amount than the amount that is available in his account up to a specified limit. Interest is charged on the excess amount withdrawn.

ii) Cash Credit :-

                                  Cash loan is granted against the security of the goods or personal security of more than one person other than the borrower. Interest is charged on the actual amount withdrawn.

iii) Discounting Bill of Exchange :-

                            Now-a-days people do not wait for the bill of exchange to mature. Banks give loans to people by discounting bills of exchange. When bills of exchange mature banks get back their payment form the person’s who have drawn the bill or who are liable to pay the bills. Banks get commission for discounting the bills.

iv) Fixed Term Loan :-

                               Such loans are generally given for a period of One to Ten years to traders, producers, industrialists etc. If the loan is taken for 5 years or more, rate of interest is higher. If loan is taken for 1 or 2 years the rate of interest is low.

C) Development OF Loan :-

                                      This is also an important function of bank in settling debts. It is more suitable to use Cheques than Cash.

i) Bearer Cheque :-

                        A bearer Cheque can be encashed immediately when presented at the bank by the bearer (any person presenting the Cheque) of it.

ii) Crossed Cheque :-

                       A Crossed Cheque is one in which two parallel lines are drawn at the left hand side corner of the Cheque. Such Cheques cannot be encashed immediately but has to be deposited in the payee’s account in the bank. The amount gets credited in the account.

D) Remittance Of Funds :-

                                  Commercial Banks help in remitting (sending) funds from one place to another by issuing bank drafts, mail transfers, telegraphic transfers etc. by charging some commission.

   2) Secondary Function OR Non Banking Function :-

A) Agency Service :-  

                          Commercial Bank provide a number of service as an agent of customers. These include :

i) Transfers Of Money :-

                                     This is done by means of Cheques, drafts and telegraphic transfers etc. The bank charges a small commission for providing these services.

ii) Executing Orders :- 

                                       Standing orders are performed such as payment of insurance premium, payments of subscription fees of clubs and societies.

iii) Trustee :-

                      Bank also acts as a trustee or executor of will created by its customers. This means undertaking the administration of Estates as Executor or trustee. This includes acquiring and holding and generally dealing with any property right, title or interest in any such property.

B) General Reserves :-

                              Commercial Bank performs a number of general utility service.

i) Safe Deposit Vault :- 

                               Lockers are provided in various sizes on payments on a fixed rent. The lockers are situated in a strong room, generally underground where walls and ceilings are fireproof. The articles kept in the lockers remain in the possession of the locker-holder and the access to the locker is given only after completion of certain formalities.

ii) Letters of Credits :-

                               Letters of credit are issued by commercial banks to help traders to buy goods from foreign countries on credit. It is a document or an order issued by a bank in one place, authorising some other bank in some other place (foreign country) to honour the drafts or cheques of the person named in the document. The payment is limited to the amount shown in the letter and the amount is chargeable to the issuer of the letter of credit.

iii) ATM & Credit Card Facilities :-

                            Automated Teller Machines facilities provide cash easily and quickly 24 hours a day. Credit Card allows a person to buy goods and services upto certain specified limit without immediate payment. Purchases can be made on credit basis. Amount is paid to shops, hotels etc by the bank. The banks collect the amount due from the customers by debiting their account.