Commercial banks

Presented by, Neethi Gireesh (2407) Mitika Kumari (2411) Purnima Gupta (2415) Roshika (2419) Konica Aggarwal (2421) Pankaj Mohan Azad (2429)

Banks

First : Banks take leading role in developing other financial intermediaries and markets.

Second : Corporate sector heavily depends on banks to meet its financial needs.

Finally : Banks cater to needs of vast number of savers from the household sector.

Bank - Defined

According to Section 5(b) of the BR Act banking is 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.
Maintaining deposit accounts including current accounts. Issue and pay cheques. Collect cheques for the

banks customers.

Commercial Banks

Commercial Banks in India

Scheduled Commercial Banks Unscheduled Commercial Banks.

A commercial bank is a financial intermediary which collects credit from lenders in the form of deposits and lends in the form of loans. A commercial bank holds deposits for individuals and businesses in the form of checking and savings accounts and certificates of deposit of varying maturities while a commercial bank issues loans in the form of personal and business loans as well as mortgages.

 What are scheduled commercial banks? The Scheduled Commercial Banks have been listed under the Second Schedule of the Reserve Bank of India Act, 1934. The selection measure for listing a bank under the Second Schedule was provided in section 42, of the Reserve Bank of India Act, 1934. Eg. SBI, Associates of SBI, Allahabad Bank, PNB, UCO Bank, etc.

What are unscheduled banks? Non-scheduled or unscheduled banks are those banks which are not registered under schedule of RBI act, 1934. Eg. City Union Bank Ltd., Ing Vysya Bank Ltd., SBI Commercial & International Bank Ltd., The Federal Bank Ltd.

INDIAN BANKING SYSTEM INDIAN BANKING RBI

BANKS BANKS SCHEDULED BANKS SCHEDULED BANKS

SYSTEM RBI
NON-SCHEDULED NON-SCHEDULED

STATE STATE COMMERCIAL BANKS COMMERCIAL BANKS CO-OPERATIVE CO-OPERATIVE BANK BANK

COMMERCIAL COMMERCIAL BANKS BANKS

CENTRAL CENTRAL CO-OPERATIVE BANKS CO-OPERATIVE BANKS & PRIMARY CREDIT & PRIMARY CREDIT SOCIETIES SOCIETIES FOREIGN FOREIGN

INDIAN INDIAN

PUBLIC SECTOR BANKS

PRIVATE SECTOR BANKS

SBI AND ITS SUBSIDIARIES

OTHER NATIONALIZED BANKS

REGIONAL RURAL BANKS

FUNCTIONS OF COMMERCIAL BANKS

PRIMARY

SECONDARY

Accepting deposits
Grant of loan and advances

Issuing letters of credit, travelers cheques etc.

Undertaking safe custody of valuables, important documents and securities by providing safe deposit vaults or lockers. Providing customers with facilities of foreign exchange.

Transferring money from one place to another, and from one branch to another branch of the bank
Standing guarantee on behalf of its customers for making payments for purchase of goods , machinery, vehicles etc.

Collecting and supplying business information.

Issuing demand drafts and pay orders. Providing reports on the credit worthiness of customers.

Functions of Commercial Bank

I.

Primary Functions
Accepting deposits: Mobilize deposits from public. Grant of loans and advances: Given to members of public and to the business organizations at a higher rate of interest. The difference between the rate of interest allowed on deposits and the rate charged on the loans, is the main source of a banks income.

II.

Secondary Functions
Issuing letters of credit, travelers cheques, circular notes, etc. Undertaking safe custody of valuables, important documents and securities by providing safe deposit vaults or lockers. Providing customers with facilities of foreign exchange.

 Transferring money from one place to another, and from one branch to another branch of the bank. Standing guarantee on behalf of its customers for making payments for purchase of goods, machinery, vehicles, etc. Collecting and supplying business information. Issuing demand drafts and pay orders. Providing reports on the credit worthiness of customers.

Investment Policies of Commercial Bank

Each bank is responsible for framing its own Internal Investment Policy Guidelines. The Asset Liability Committee (ALCO) of a bank, comprising senior bank officials, headed by the CEO, draft the investment policy of the bank. The aim of an Investment Policy of a bank is to create a broad framework within which investment decisions of the Bank could be taken. The Investment Policy outlines general instructions necessary to ensure that operations in securities are conducted in accordance with sound and acceptable business practices.

While the policy remains within the framework of the RBI guidelines, with respect to bank investment, it also takes into consideration certain bank-specific factors, viz., the bank's liquidity condition and its ability to take credit risk, interest rate risk and market risk. The Investment Policy provides guidelines with respect to investment instruments, maturity mix of investment portfolio, exposure ceilings, minimum rating of bonds/ debentures, trading policy, accounting standards, valuation of securities and income recognition norms, audit review and reporting and provisions for Non-Performing Investments (NPI). It also outlines functions of front office/ back office/ mid office, delegation of financial powers as a part of expeditious decision-making process in treasury operations, handling of asset liability management (ALM) issues, etc. Based on the market environment envisaged by Asset Liability Committee (ALCO) in the Asset Liability Management (ALM) Policy, a Strategy Paper on investments and expected yield is usually prepared which is placed before the CEO of the Bank. A review of the Strategy Paper may be done at, say half yearly basis and put up to the CEO.

Activities of Commercial Bank

These can be broadly classified as:

Basic Banking activities

Foreign exchange Services Banks services to Government Payment and Settlement Systems Paper based clearing systems Cheque Truncation Electronic Payment Systems NRI Remittances Cash Management services and Remittances

Continued

Para-Banking activities

Primary Dealership Business Investment Banking /Merchant Banking services Mutual Funds Business Pension Funds Management (PFM) by Banks Depository Services Wealth Management/Portfolio Management Services Bancassurance

Recent Trends
Technology
Outsourcing Financial

of services

inclusion

Technology

Major advantage of Indian Banks are the availability of major IT companies in India, who are the world leaders in IT application. Internet Banking: Online access to account information and payment and fund transfer facilities.

Mobile Banking Transactions: Geographical reach of mobile phones. RBI has adopted Bank Led Model in which mobile phone banking is promoted through business correspondents of banks.

Till June 30, 2009, 32 banks had been granted permission to operate Mobile Banking in India, of which 7 belonged to the State Bank Group, 12 to nationalized banks and 13 to private/ foreign banks. Source: Report on Trends and Progress of Banking in India 2008-09, RBI.

Point of Sale (PoS) Terminals: In recent years, banks are making efforts to acquire Point of Sale (PoS) terminals at the premises of merchants across the country as a relatively new source of income. The installer of the PoS terminals is the acquirer of the terminal and the merchants are required to hold an account with the acquirer bank. The acquirer bank levies each transaction with a charge, say 1% of the transaction value. This amount is payable by the merchant.

Outsourcing of Services

Growing competition in the banking sector has forced banks to outsource some of their activities to maintain their competitive edge. Decision to outsource could be on cost considerations as well as lack of expertise in banks in delivering certain services. Risks involved in the process of outsourcing to a third party may include non-compliance with regulations, loss of control over business, leakage of customer data, lack of expertise of the third party, poor service from third party, etc.

Financial Inclusion
Financial Inclusion implies providing financial services viz., access to payments and remittance facilities, savings, loans and insurance services at affordable cost to those who are excluded from the formal financial system.

Initiatives taken by the RBI:

The Lead Bank Scheme introduced by the RBI in 1969. Under the scheme, designated banks are made key instruments for local development and entrusted with the responsibility of identifying growth centers, assessing deposit potential and credit gaps and evolving a coordinated approach for credit deployment in each district. As at March 2009, there were 26 banks, mostly in the public sector, which have been assigned lead responsibility in 622 districts of the country. The RBI's recent measures to promote financial inclusion includes:
Advising banks to open 'no frills' accounts. Introduction of Business Correspondent (BC)/ Business Facilitator (BF) model. Adoption of Information and Communication Technology (ICT) solutions.

Micro-Credit:
Provision of credit and other financial services and products of very small amount to the poor in rural, semi-urban and urban areas for enabling them to raise their income levels.

Banks are allowed to devise appropriate loan and savings products and the related terms and conditions including size of the loan, unit cost, unit size, maturity period, grace period, margins, etc. Such credit covers not only consumption and production loans for various farm and nonfarm activities of the poor but also includes their other credit needs such as housing and