commercial bank and its functions,

1. Banking and Financial
Institutions
By: Abbas vattoli

2. Syllabus

3. Origin of the term Bank
• Italian word – ‘banco’
• Latin word – ‘bancus’
• Greek word – ‘banque’
• French word – ‘banque’
Which mean bench
• German word – ‘banc’ or ‘banck’ which means a
joint stock fund.

4. Definition
• Sec 5(1)(c ) of indian Banking regulation Act
1949 defines
• The term banking company as any company
which transacts the business of banking in india.
• Sec 5(1) (b) defines the term banking as
accepting, for the purpose of lending or
investment, of deposits of money from the
public, repayable on demand or otherwise and
withdrawable by cheques, draft, order or
otherwise.

5. • In sec 6 various activities included in banking
are listed such as lending, borrowing, accepting
and discounting of bills, dealing in foreign
currency, deposit lockers, trasfer of money,etc
• Sec 8 prohibits a bank from buying and selling
goods
• Sec 9 prohibits from holding immovable
property

6. Evolution of banking
• Banking existed in babylonia as early as in 2000
BC
• Temples were used a place for money lending
• Banking confined money lending
• Bank of england established in 1694
• In india banking was in existance during vedic
period
• Modern banks emerged only during industrial
revolution(1750 to 1850 )

7. Ancestors of modern banks
• Merchant banks- traders become financiaers
• Money lenders- only lends money
• Goldsmiths- for safe keeping of valuables and
money

8. Role and Importance of Banks
• Deposit mobilization
• Granting of credit
• Creation of credit
• Channalize funds into productive investments
• Provision of finance to the government
• Protecting the funds of depositors
• Provision of remittance facilities
• Provision of medium of exchange
• Discharge of social responsibility
• Innovative services

9. Classification of banks
based on functions
• Commercial banks or deposit banks
• Industrial banks or investment banks
• Agricultural banks-(agricultural co operative
banks and land mortgage or development banks)
• Exchange banks(export/import)
• Savings banks (small savings- not found in
india)
• Central banks( banker’s bank)

10. Nature of commercial banking
• They are the intermediaries between lenders and
borrowers
• They are not merely purveyors of money , but
also manufacturers of money
• It renders variety of services to the depositors
and general public
• They are the oldest banking institution and hold
lien share in the total banking operation

11. Commercial banking principles
• Profitability
• Liquidity
• Security of safety
• Principle of social responsibility of social good
• Purpose of advances
• Mass banking

12. Functions of commercial banks
Primary functions
• Accepting deposits
• Lending money
• Investment of funds
• Creation of moeny

13. Type of deposits account
• Current Accounts-by business people, numerous
transactions, no interest, overdraft facility
• Savings bank account- for promoting savings
among people, low rate of interest, restrictions
on no and size withdrawals.
• Fixed deposits account- fixed amt for fixed
period at fixed interest. Time liability and get
high interest.
• Recurring deposits account

14. Type of advances
• Loans
• Overdrafts
• Cash credits
• Discounting of bills

15. Subsidiary or secondary functions
Agency services( as an agent of the customer)
• Collection of money
• Making of payments
• Purchase and sale of securities
• Advising customers regarding stock exchange
investments
• Arranging for remittances of funds(Bank draft, mail
transfers, telegraphic transfer)
• Acting as trustee, executor, administrator or
attorney of customers
• Serving as correspondents and representatives of
customers

16. General Utility serivices
• Safe custody of valuables(accepting valuables for safe
custody or hiring out safe deposit lockers)
• Dealing in foreign exchange business (export finance,
import credit, deffered payment guarantee, forward
contracts, issue of solvency certificates, letter of
introduction, provision of trade information)
• Issue of traveler's letter of credit, circular note, travelers
cheques
• Acting as refereee
• Collecting information about other business men for
customers

17. New lines of activities of commercial
banks
• Rendering of merchant banking services
• Underwriting of shares and debentures
• Factoring services
• Lease financing
• Housing finance
• Issue of credit and debit cards
• Consultancy services
• Setting up of mutual funds

18. Classification of commercial banks
On the basis of lending practices
• Pure banking – lend only for short period to
industries and commerce
• Investment banking – provide medium and long
term funds to industries and commerce
• Mixed banking – provides both short term and
long term finance to industries and commerce

19. Classification of commercial banks
On the basis of structure of commercial banking
• Group banking – a group of banks separately
incorporated are brought under the control of a
holding company. It was popular in USA during
1930s
• Chain banking – a number of separately
incorporated banks are brought under common
control by a device other than holding
company.(inter locking of directors)

20. • Correspondent banking – Unit banks in small towns
are linked with big correspondent banks situated in
nearby bigger towns so the correspondent banks are
the intermediaries through which all the unit banks
are linked with the banks in the very important
financial centers
• Branch banking – an individual bank carries on
banking business with a network of branches
• Unit banking – an individual bank carries on
banking business through a single office or through
few offices

21. Other systems of commercial banking
• Universal banking – a commercial bank offers a
wide variety of banking and financial services
beyond those offered by a traditional bank.
• Narrow banking – a bank which provides only
limited banking activities in a particular region

22. Functions of Central bank
 Issuing currency notes
• Principle of Note issue –
• Currency principle(100% gold backing) and
banking principle
• Systems of note issue –
• Fixed fiduciary system (central bank can issue
notes up to a limit call fiduciary limit with out
any gold backing.

23. • Maximum fiduciary system
• Proportional fiduciary system (since 1956 india
is on this system)
• Minimum reserve system

24. acting as a banker to the state or government
Central bank as the bankers bank
Controller of credit
Acting as the custodian of the nations gold and
foreign exchanges reserves
Developmental functions of central bank

25. Credit control
• Credit control means regulating
credit(expansion and contraction) according to
the requirements of the economy
• channelizing the credit into productive uses

26. Objectives credit control/monetary
policy
• Internal price stability
• Economic stability
• Full employment
• Economic growth
• Stability in money market
• Stability of foreign exchange rates
• International economic equilibrium

27. Methods of credit control
Quantitative of general methods
• Bank rate policy – bank rate or discount rate is
the official minimum rate at which the central
bank rediscounts eligible bills of exchange
offered by commercial banks and other financial
institutions.(lending rate of the CB)
• Open market operation – purchase and sale of
govt securities in the open market

28. • Variable cash reserve ratio(CRR)
• Variation of statutory liquidity ratio(SLR)

29. Current rates
Policy rates
• Bank rate- 9%
• Repo rate- 8%
• Reverse repo- 7%
Reserve ratios
• CRR- 4.75%
• SLR- 24%
Lending/ Deposit rates
• Base rate – 10 -10.75%
• Deposit rate – 8.5- 9.25

30. Qualitative or selective credit control
• Which control the quality or uses of credit. In
other words it encourages credit to essential uses
and discourages credit to non essential uses
•

31. Types of qualitative credit contol
• Fixation of margin requirement on secured loans
• Regulation of consumer credit
• Control of bank advances through directives
• Rationing of credit – central bank limit the total amount
of loans or specific catogories loans granted by
commercial banks
• Moral suasion (persuade)
• Direct Action (punishment against violating banks)
• Publicity(educating and influencing public openion)

32. History of development of indian
banking system
• Banking in the form of money lending was in
existance during vedic period
• During pre independence period banking was
mainly carried out by
• Indigenous bankers and money lenders
• Indigenous bankers are individuals or firms dealing
in hundies and some times accepts deposits
• Money lenders are persons who lend their own
money mainly for consumption.

33. • Bank of hindustan, the first bank in india started
by britishers in 1770.
• Presidency bank of bengal 1806
• Presidency bank of bombay 1840
• Presidency bank of madras 1846
• The first joint stock bank in india is Oudh
commercial bank in 1881 followed by PNB 1895

34. • Imperial bank was formed in 1921 through the
presidency banks of bengal bombay and madras
• RBI was established in 1 st april 1935
Post independence
• RBI nationalised 1st jan 1949
• The banking regulation act 1949 passed
• The imperial bank nationalised and converted into
state bank of india in 11th july 1955
• 14 major banks were nationalized I on 19th jul 1969
and 6 more banks in 15th april 1980
• Several RRBs and developmental banks established

35. • Today there are 27 public sector banks
• 30 private sector scheduled commercial banks
• 2 private sector non scheduled commercial
banks
• 31 foreign banks
• 196 Regional rural banks

36. Non performing aseets
• NPA is an asset which ceases to generate income
for the bank. It mean an advance or credit
facility in respect of which the interest or
installment of principal remains overdue for a
period of more than 90 days with effect from 31st
march 2004.

37. Impact of NPA
• They do not generate income
• They enhance the administrative, legal and
recovery costs of loans
• They reduce profitability of the lending bank
• They affect banks credibility and image
• They adversely affect decision making for fresh
loans

38. Early indicators of NPA
• Financial warning signal – default in repayment,
falling profits, rising level of bad debts, decliainign
sales
• Operational warning signal- under utilisation of
capacity, frequent labour problems, over stocking
• Banking warning signals- frequent requests for
further loans, delay in payment of interest or install
ment due, reduction in transactions, dishonour of
cheques, opeing account with other banks, etc

39. • Managerial warning signal- poor financial
control, frequent change in ownership,
undertaking of undu risks, window dressing
• External warning signal – economic recession,
change in govt policies, new competition

40. Factors responsible for NPA
Internal factors
• Diversion of funds by the borrowers
• Delay and consequent increase in cost of the
project
• Business failure
External factors
• Recession
• Shortage of input/power
• Rise in prices of inputs

41. Techniques for managing NPA
• Ensure that loans are diversified across sectors
• Loans are granted to credit worthy borrowers
• Improving its monitoring system
• React to early warning signals
• Knowing clients profile thoroughly
• Adapting credit rating system
•

42. Banking legislations in india
• The Negotiable instruments Act 1881
• The banking regulation act 1949
• The reserve bank of india act 1934

43. Banking ombudsman scheme
• A banking ombudsman is a person appointed by
the reserve bank of india to redress customer
complaints against certain deficiencies in
banking services
• It is to resolve and settle complaints relating to
the provisions of banking services

44. E Banking
• E banking means conduct of banking operations
through electronic means of devices, such as
computers, telephones, mobile phones, ATMs,
etc
Forms of e banking
• Internet banking
• Mobile banking
• Telephone banking
• Home banking

45. Credit card
A credit card is an instrument which provides
instantaneous credit facilities to its holder to
purchase goods or services from business
establishments enrolled as members of the credit
card system
Debit cards
It also a payment card. It is used to obtain cash, goods
or services automatically deviting the payments to
the card holders bank account instantly upto the
credit balance which exists in the customers bank
accoun

46. Electronic Fund Transfer
• It is a scheme of RBI introuduced in 1996.
• It helps banks to offer their customers money
transfer service from one account to another
account of a bank branch both intercity and intra
city and also from one account of one bank to
another account of another bank in the same city
or different cities