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Commercial Banking _Terms and Knowldg. v 1.0

Commercial Banking _Terms and Knowldg. v 1.0

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Published by Pranay Jain

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Published by: Pranay Jain on Jul 05, 2012
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Commercial Banking
Banking Defination: Accepting for the purpose of lending or investment of deposits of moneyfrom Public, Repayable on demand or otherwise and withdrawable by cheques, drafts, order,etc.A
commercial bank
, also called a business bank, is a financial intermediary which providesmoney market, checking, and savings accounts and accepts time deposits from customers.These banks are under the authority of national central banks. At present, there are over6,500 FDIC-insured commercial banks in the United States, down from over 12,000 in 1990.They operated through some 89,170 offices and 82,641 branches in 2010.Commercial banks offer business loans, instalment loans, and other loan types, issue bankchecks and bank drafts, and process payments through internet banking, EFTPOS, telegraphictransfer, or other means. In addition, commercial banks provide standby and documentaryletter of credit, cash management and private equity financing. A traditional role of commercial banks has been to unde
rwrite securities, but today’s big commercial banks have
their own investment bank arms which are involved in this. Commercial banks also provideguarantees and offer performance bonds, along with safekeeping of documents. Finally, unittrusts, insurance, and brokerage are also offered by commercial banks.Commercial banks also work as retail banks and serve businesses as well as individual clients.Business entities have different needs and requirements than consumers. Some companiesrequire that the bank accommodates a considerable volume of cash deposits and credit cardpayments. In general, commercial banks serve the needs of small and large businesses byproviding a variety of services. These include savings and checking accounts, loans for capitaland real purchases, letters of credit, and lines of credit. Other services offered to businessesare foreign exchange, lockbox services, and transaction and payment processing. Commercialbanks accept deposits to corporate and personal accounts and then use the money to extendfinancing to businesses and individuals. This is the opposite of what investment banks do
 they specialize in generating revenue through investment activities. Commercial banks extendvarious loans to their clients. To their individual customers, commercial banks give out loansfor the purchase of homes, vehicles, and other personal property. Commercial banks alsoextend loans for debt consolidation and home improvements. Business entities obtain businessloans for the purpose of purchasing operating supplies or financing a payroll. On the otherhand, if a business aims at corporate restructuring or realignment, such business loans aremore likely to be financed by an investment bank.Commercial banks offer three main types of loans
unsecured loans, secured loans, andmortgages. Unsecured loans may be available under various marketing packages, includingpersonal loans, credit card debt, bank overdrafts, and other loans. Unsecured loans are notguaranteed with collateral unlike the secured variety. Mortgage loans are a popular debtinstrument, which is used to buy real estate. Many commercial banks did not specialize in realestate loans in the past, securing their earnings mainly from consumer and commercial loans.With changes in banking policies and laws, these banks play a more active role in homefinancing.
 
 In addition to these financial products, commercial banks feature a variety of savingsprograms. They offer interest-bearing checking accounts, savings accounts, certificates odeposit, and other financial services.Finally, commercial banks have some ancillary functions as well. These include agency andgeneral services. Some banks deal with payment and collection of checks and buy and sellstocks. They may also offer SMS banking, online banking, advisory services, and more.
Banking Business: prodcuts and Deposits
 
Business of Banking : Accepting deposits, borrowing money, lending money, investing, dealingin bills, dealing in Foreign Exchange, Hiring Lockers, Opening Safe Custody Accounts, IssuingLetters of Credit, Traveller's Cheques, doing Mutual Fund business, Insurance Business, actingas Trustee or doing any other business which Central Government may notify in the officialGazette
Demand deposit
is a term which refers to an account in which money has been deposited and can bewithdrawn without notifying the depository entity and at any time. With this type of account, personscan withdraw their money whenever required. This is the opposite to a term deposit which is not to befreely accessed over a specified period of time. Most savings and checking accounts represent demanddeposit, with funds being accessible by account holders. Checking accounts are among the mostcommon accounts that work on the demand deposit principle. Money can be withdrawn immediatelyafter it has been posted to the checking account.Bank money in the form of demand deposits is held in commercial banks. It is the larger part of themoney supply in states, with account balances of demand deposits being money. Money supplyincludes demand deposits and currency. Deposited money can be used to various purposes, such aspayment for services and products, settling debts, etc.During periods of financial crisis, depositors withdraw their money which results in a reduced moneysupply. The opposite is true for periods of stability and growth.In general, depositors can withdraw their money without making a special arrangement with theircredit union or bank. Withdrawals can take place if the balance is sufficient and the procedures of thebank are followed. Depending on the regulations of the financial institution, some exceptions mayexist, as is the case with demand deposits including financial instruments that have not cleared beforethe money is released. Restrictions may also apply to checks by foreign financial institutions.Electronic funds transfer is a kind of demand deposit which is available for withdrawal within minutes.Electronic funds transfers are bank-to-bank transfers, which are pre-qualified by the sendinginstitution. In many cases, receiving banks immediately post the funds. Electronic transfers of thistype allow recipients to withdraw the full amount just minutes after the money has been posted.In general, withdrawals can be made in several ways. One way to do that is to present a check that iswritten, with money deposited in the bank account. The financial institution then checks the availablebalance and if money is sufficient, the check is being cashed for the client. Using a debit card isanother way to withdraw money from a demand deposit. Some restrictions may apply, for example,there may be a limit on the amount that can be withdrawn within a 24-hour period. A third way towithdraw money is by transferring it from one account to another. Sometimes demand deposits aremade into checking accounts. Clients may decide to transfer some or all of the money into a savings
account. This can be done online, by phone, or at the local branch of one’s bank.
Basically, any account from which funds can be withdrawn on demand is a demand deposit. Moneymarket accounts fall into this category. In contrast, certificates of deposit do not allow accountholders
 
to withdraw their money until maturity. If money is withdrawn before that, the holder risks incurringfees and interest penalties. Money market accounts and savings accounts are both demand deposits
FIXED OR TIME DEPOSITS
Time deposits are deposits accepted by banks for a specified period of time. In terms of RBI directivesthe minimum period for which term deposits can be accepted is 15 days. The banks generally do notaccept deposits for periods longer than 10 years.1> Banks pay interest on term deposits based on the period of deposits and normally pay higherinterest for longer term deposits.2> Banks have full discretion to fix their interest rates on deposits and these rates are varied fromtime to time depending on market conditions.3> Changes made in interest rates from time to time do not alter the interest paid on the existingdeposits.4> When banks quote a certain percentage of interest per annum for a given period it is understoodthat interest payments are made on a quarterly basis (see IBA Master Charts).5> The depositor can collect interest on every quarter or its discounted value at monthly rests or availquarterly compounding benefits and receive principal and interest on maturity.6> RBI has now permitted banks to quote a higher rate of interest for individual deposits more thanRs.15 lacs.7> Banks are allowed to levy a penalty for premature encashment of deposits at their discretion.Banks generally pay interest on such deposits as applicable for the period which deposit has been keptwith the bank (less penalty if levied).8> Bank allow loans against the fixed deposits on demand. Margin retained over the depositoutstanding and interest rate charged thereon are decided by the bank and may vary from bank tobank.overdraft
Overdrafts
occur when bank customers withdraw cash from their account, with the balance goingbelow zero. An overdraft is basically a form of credit extended by a creditor when the accountbalance reaches zero. Overdrafts allow bank clients to withdraw money even when there are nofunds in the account. In other words, banks allow their clients to borrow certain amount of money.With overdraft accounts, financial institutions cover checks to prevent them from bouncing. Given
that overdrafts are a type of loan, bank clients pay interest on the overdraft’s loan balance. On the
other hand, the interest rate is often lower compared to credit cards.Overdrafts may occur for various reasons, among which not maintaining proper account register,merchant error, unexpected electronic withdrawals, and more. When the accountholder fails tomaintain his account register well, overspending is due to negligence. Another reason for overdraftis, in fact, the possibility to overdraw money using an ATM. Some ATMs and banks allowwithdrawals even when cash is insufficient in the account. ATMs are sometimes unable tocommunicate with the bank of the accountholder, with this resulting in automatic authorization of withdrawals. With temporary deposit holds, banks can put on hold a deposit that has been madeto an account. Bank policies or Regulation CC may be responsible for that. Given that money is

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