This PPT is useful for SYBMS Finance Specialization students CLASS: SYBMS (FINANCE) SUB:- BASICS OF FINANCIAL SERVICES CHP:- 4 Development Banks & Commercial Banks

2.  The term commercial bank refers to a
financial institution that accepts
deposits, offers checking account
services, makes various loans, and
offers basic financial products like
certificates of deposit (CDs) and
savings accounts to individuals and
small businesses.
 It can also refer to a bank, or a division
of a large bank, which deals with
corporations or large/middle-sized
business to differentiate it from a retail
bank and an investment bank.
 Commercial banks include private
sector banks and public sector banks
INTRODUCTION TO
COMMERCIAL BANKS

3. FEATURES OF COMMERCIAL
BANKS
ACCEPTING
DEPOSITS
AND LENDING
LOANS
FINACIAL
INSTITUTION
PROFIT
MOTIVE
DEALER OF
FOREIGN
CURRENCY
PUBLIC OR
PRIVATE
OWNERSHIP

4. FUNCTIONS
PRIMARY
FUNCTIONS
ACCEPTANCE OF
DEPOSITS
Saving Deposits
Current Deposits
Fixed Deposits
Other Deposits
ADVANCING
LOANS
Loan
Cash Credit
Overdraft
Discounting of
BOE
CREDIT CREATION
SECONDARY
FUNCTIONS
AGENCY
FUNCTIONS
GENERAL UTILITY
SERVICES

5. BALANCE SHEET OF COMMERCIAL
BANKS
LIABILITY
CAPITAL
RESERVE FUND
DEPOSITS
BRROWING FOM OTHER BANKS
BILLS PAYABLE
ACCEPTANCES AND ENDORSEMENTS
CONTINGENT LABILITIES
PROFIT AND LOSS A/C
BILLS FOR COLLECTION
ASSETS
CASH
MONEY AT CALL AND SHORT NOTICE
BILLS DISCOUNTED
BILLS FOR COLLECTION
INVESTMENTS
LOANS AND ADVANCES
ACCEPTANCE AND ENDORSEMENTS
FIXED ASSETS

6. LIQUIDITY
PROFITABILITY
SAFETY AND SECURITY
DIVERSITY
SALEABILITY OF SECURITIES
STABILITY IN THE VALUE OF
INVESTMENTS
PRINCIPLES OF TAX-EXEMPTION
OF INVESTMENTS

7. PRINCIPLES OF COMMERCIAL BANKS

8. A non performing asset (NPA) is a loan or advance for which the principal or interest
payment remained overdue for a period of 90 days
A nonperforming asset (NPA) refers to a classification for loans or advances that are
in default or in arrears. A loan is in arrears when principal or interest payments are
late or missed. A loan is in default when the lender considers the loan agreement to
be broken and the debtor is unable to meet his obligations.

9. CAUSES OF NPA
Internal External
TYPES OF NPA
Gross NPA Net NPA

10. CAUSES OF NPA
INTERNAL FACTORS
• Funds borrowed for a specific purpose but not used for the said purpose.
• Project not accomplished in time.
• Poor recovery of receivables.
• Excess capacities created on non-economic costs.
• In-ability of the corporate to raise capital through the issue of equity or other debt
instrument from capital markets.
• Business failures.
• Deviation of funds for expansion/modernization/setting up new projects/ helping or
promoting sister concerns/
• Willful defaults, siphoning of funds, frauds, fraud, disputes, management disputes,
misappropriation etc.
• Deficiencies on the portion of the banks viz in credit appraisal, monitoring and follow
ups, Delay in settlement of payments/subsidiaries by government bodies etc.

11. CAUSES OF NPA
EXTERNAL FACTORS
• 1. Incomplete legal system:
• a.Long Legal Procedures.
• b. Changes that had taken place in labour laws
• c. Lack of sincere effort
• 2. Scarcity of raw material, power and other resources.
• 3. Industrial recession.
• 4. Shortage of raw material, raw material/input price escalation, power
shortage, industrial recession, excess capacity, natural calamities like floods,
accidents .
• 5. Failures, non-payment/over dues in other countries recession in other
countries, externalization problems, adverse exchange rates etc.
• 6. Government policies like excise duty changes, import duty changes etc.

12. TYPES OF NPA
GROSS NPA
• Gross NPA is the summation of all
loan assets that are classified
as NPA as per RBI guidelines.
• Gross NPA Ratio is the ratio of
total gross NPA to total advances
(loans) of the bank.
• It reveals the quality of loans made
by banks.
• Gross NPAs Ratio = GrossNPAs
Gross Advances
NET NPA
• Net non-performing assets
= Gross NPAs – Provisions.
• Net NPA to Advances (loans)
Ratio is the ratio of Net NPA to
advances.
• It is used as a measure of the
overall quality of the bank's
loan book
• Gross NPAs Ratio =
Gross NPAs – Provisions
Gross Advances – Provisions for
asset classification

14. STANDARD
ASSETS
SUB-
STANDARD
ASSETS
DOUBTFUL
ASSETS
LOSS
ASSETS

15. They rarely Default up to a period of 90 days.
Provides their interest and principal installments on
time
Standard assets are also called performing assets
From the year 31.03.2000, the banks should make a general
provision of a minimum of 0.40% on standard assets on global loan
portfolio basis.
The provisions on standard assets should not be
calculated for arriving at net NPAs.
The provision against standard Assets under ‘Other Liabilities and
Provisions – Others’ in schedule 5 of the balance sheet.
STANDARD ASSETS

16. SUB-STANDARD ASSETS
Interest and Principal remains unpaid for 90-Days to
Period upto 12 Months
Current net worth of borrower /guarantor or current
market value of the security charged is not enough for
recovery of dues
The asset has well-defined credit weakness and
endanger the liquidation of the debt
Characterized by distinct possibility that banks will
sustain some loss, if deficiencies are not corrected.

17. DOUBTFUL ASSETS
If an asset remains sub-standard for period of 12
months then it becomes doubtful assets.
Recovery of bank dues is doubtful
W.e.f. March 31 2005 an asset would be classified as
doubtful if it remained in the sub standard category
for 12 months

18. LOSS ASSETS
It comprises assets where a loss has been identified
by the bank or the RBI.
These are generally considered uncollectible.
Their realizable value is so low that their continuance
as bankable assets is not warranted
Although there may be some salvage or recovery
value.
They would have been identified as “Loss Assets” by
the bank or internal/external auditors or the RBI.
But The amount would not have been written off
wholly.

19. DEBT RECOVERY
TRIBUNALS (DRT)
ASSET RECONSTRUCTION
COMPANIES (ARC)
THE SECURITIZATION
ACT
CORPORATE DEBT
RESTRUCTURING (CDR)
PROMPT CORRECTIVE
ACTION
•MANDATORY ACTION
•DISCRETIONARY ACTION

20. •Banks are required to undertake special drive to reduce the stock
of NPA and try to control generalization of fresh NPAs.
•Banks should review the loan policies from time to time.
•Banks have to upgrade credit policies regularly.
•Banks will Also strengthen the measures to follow up of loans.
•Banks will effectively follow up the cases filed in the court of law.
•Banks will have to put in proper credit risk management.
•Banks will have to reduce concentrations only on loans.
MANDATORY
ACTIONS
• Banks have to take prior approval from RBI for
branch expansion or for undertaking new line of
business.
• Banks have to reduce the rate of dividend or not
to declare dividends if there are NPAs.
• The banks have to reduce the stake in subsidiaries
in which there is high ratio of NPAs.
DISCRETIONARY
ACTIONS
PROMPT CORRECTIVE ACTIONS

21. BASIS CENTRAL BANK COMMERCIAL BANK
Meaning The apex body which
regulates the supply of money
in the economy and
administers the banking
system operations in a country
A financial institution which
initiate deposits, provide loans
and invest the public's money
to earn profits
Ownership Public Public or private
Banking System Apex Institute Constituent Unit
Bank Chief Governor Chairman
Number of Banks Single Many
Customers Other banks and government General public
Motive or Objective Controlling credit system Profit earning
Foreign currency Functions Guardian of foreign currency Dealer of foreign currency
Governing Body in India Reserve Bank of India Act 1934 Banking Regulation Act 1949

22. BASIS CENTRAL BANK COMMERCIAL BANK
Loans Lender of the last resort for
commercial banks
Lending commercial loans,
personal loans, housing loans,
trade finance, vehicle loans
and mortgage loans
Other Functions Issuing government bonds,
formulates banking
regulations and fund
clearance among member
banks
Safe deposits service, foreign
exchange provision and letter
of credit
Note Printing Authority Yes No
Monetary Authority Yes No
Monetary Supply Function Yes No
Monopoly Yes No
Example with Reference to
India
Reserve Bank of India (RBI) State Bank of India (SBI),
Central Bank of India (CBI),
Canara Bank, etc.

23. INTEREST RATE REFORMS
Perhaps the single most important element of the financial sector reforms has been the
regulation of interest rates.
Interest rates were freed on corporate bonds, most bank lending and bank deposits
above one year maturity.
Introduction of auctions coupled with reduced pre-emption led to more market
determined interest rates for government securities.
Administered interest rates are now confined mainly to short term bank deposits, priority
sector lending and deposits of non-banking financial companies.
For all practical purposes, financial repression is a thing of the past. Even on short term
retail bank deposits, which are still regulated, the ceiling rate is well above the historic
average rate of inflation. Moreover, quite often the ceiling has not been a binding
constraint in the sense that actual interest rates have below the regulatory ceiling.
The government reduced its pre-emption of bank funds and moved to market
determined interest rates on its borrowings.