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COMMERCIAL BANKING IN INDIA

1.INTRODUCTION
Opinions differ as to the origin of the work "Banking". The word "Bank" is
said to be of Germanic origin, cognate with the French word "Banque" and
the Italian word "Banca", both meaning "bench". It is surmised that the word
would have drawn its meaning from the practice of the Jewish moneychangers of Lombardy, a district in North Italy, who in the middle ages used
to do their business sitting on a bench in the market place. Again, the
etymological origin of the word gains further relevance from the derivation of
the word "Bankrupt" from the French word "Banque route" and the Italian
word "Banca-rotta" meaning "Broken bench" due probably to the then
prevalent practice of breaking the bench of the money-changer, when he
failed.
Banking is different from money-lending but two terms have in
practice been taken to convey the same meaning. Banking has two important
functions to perform, one of accepting deposits and other of lending monies
and/or investment of funds. It follows from the above that the rates of interest
allowed on deposits and charged on advances must be known and reasonable.
The money-lender advances money out of his own private wealth, hardly
accepts deposits and usually charges high rates of interest. More often, the
rates of interest relate to the needs of the borrower. Money-lending was
practised in all countries including India, much earlier than the recent type of
Banking came on scene.
In the earlier societies functions of a bank were done by the corresponding
institutions dealing with loans and advances. Britishers brought into India the
modern concept of banking by the start of Bank of England in 1694. In 1708,
the bank of England was given the monopoly for the issue of currency notes

COMMERCIAL BANKING IN INDIA

by an Act. In nineteenth century various banks started operations, which


primarily were receiving money on deposits, lending money, transferring
money from one place to another and bill discounting.
Commercial banks are the oldest, biggest, and fastest growing intermediaries
in India. they are also the most important depositories of public saving and
the most important disburses of finance. Commercial banking in India is a
unique systems, the like of which exist nowhere in the world. the truth of this
statement becomes clear as one studies the philosophy and approaches that
have contributed to the evolution of the banking policy, programmes and
operation in India.
The banking systems in India works under the constraints that go with social
control and public ownership. the public ownership of banks has been
achieved in three stages:1955,July1969, and April 1980. Not only the private
sector and foreign banks are required to meet targets in respect of sectoral
development of credit, regional distribution of branches, and regional creditdeposits ratios. the operations of banks have been determined by Lead Bank
Scheme, Differential Rate of Interest Scheme, Credit Authorisation Scheme,
inventory norms and lending systems prescribed by the authorities, the
formulation of the credit plans, and Service Area Approach.
A commercial bank is a type of financial intermediary and a type of bank.
Commercial banking is also known as business banking. It is a bank that
provides checking accounts, savings accounts, and money market accounts
and that accepts time deposits. After the Great Depression, the U.S. Congress
required that banks engage only in banking activities, whereas investment
banks were limited to capital market activities. As the two no longer have to

COMMERCIAL BANKING IN INDIA

be under separate ownership under U.S. law, some use the term "commercial
bank" to refer to a bank or a division of a bank primarily dealing with
deposits and loans from corporations or large businesses. In some other
jurisdictions, the strict separation of investment and commercial banking
never applied. Commercial banking may also be seen as distinct from retail
banking, which involves the provision of financial services direct to
consumers. Many banks offer both commercial and retail banking services.
A commercialbank is a type of financial intermediary and a type of bank.
Commercialbanking is also known as business banking. It is a bank that
provides checking accounts, savings accounts market activities. As the two no
longer have to be under separate ownership under U.S. law, some use the term
"commercialbank" to refer to a bank or a division of a bank primarily dealing.

Presently, as a part of deregulation many new generation private sector banks


have been permitted viz. ICICI 1 (IDBI) HDFC and the nationalized banks
are being privatized to the extent of 49%.

COMMERCIAL BANKING IN INDIA

1.1 DEFINATION AND MEANING


1.1 DEFINITION
Section 5 [B] Of The Act Define, Banking As, "Accepting For The Purpose
Of Lending Or Investment Of Deposits Of Money From The Public
Repayable On Demand Or Otherwise & Withdrawal By Cheques, Drafts,
Order Or Otherwise".

According To Prof. Sayers, "A Bank Is An Institution Whose Debts Are


Widely Accepted In Settlement Of Other People's Debts To Each Other." In
This Definition Sayers Has Emphasized The Transactions From Debts Which
Are Raised By A Financial Institution.

Oxford Dictionary defines a bank as "an establishment for custody of money,


which it pays out on customer's order.

MEANING
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. The term commercial bank came about as a way to
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distinguish it from an "investment bank." The primary difference between a


commercial bank and its counterpart is that a commercial bank earns revenue
by issuing primary loans from its pool of deposits while an investment bank
brings debt and equity offerings to market for a fee. Among its assets,
including loans, a commercial bank holds a portfolio of other securities to
generate proprietary income.
Commercial banking activites are different than those of investment banking,
which include underwriting, acting as an intermediary between an issuer of
securities and the investing public, facilitating mergers and other corporate
reorganizations, and also acting as a broker for institutional clients.

COMMERCIAL BANKS BASIC DEPOSITS, CREDIT, CRR


AND SLR IS COMPULSORY TO KEEP WITH RBI
Deposits Rs. 17,81,580Crore
Credits Rs. 11,27,433Crore
Bank Rate 6% (even in Oct 2005)
Prime Lending Rate (PLR) in between 10.5% -11.50%
CRR 4.50%
SLR 25%

COMMERCIAL BANKING IN INDIA

1.2 HISTORY AND STRUCTURE OF COMMERCIAL


BANKS IN INDIA
12.1 INTRODUCTION
HISTORY OF BANKING IN INDIA:
Banking in India has a very old origin. It started in the Vedic period where
literature shows the giving of loans to others on interest. The interest rates
ranged from two to five percent per month. The payment of debt was made
pious obligation on the heir of the dead person.
Modern banking in India began with the rise of power of the British. To raise
the resources for the attaining the power the East India Company on 2nd June
1806 promoted the Bank of Calcutta. In the mean while two other banks
Bank of Bombay and Bank of Madras were started on 15th April 1840 and 1st
July, 1843 respectively. In 1862 the right to issue the notes was taken away
from the presidency banks. The government also withdrew the nominee
directors from these banks. The bank of Bombay collapsed in 1867 and was
put under the voluntary liquidation in 1868 and was finally wound up in 1872.
The bank was however able to meet the liability of public in full. A new bank
called new Bank of Bombay was started in 1867.
On 27th January 1921 all the three presidency banks were merged together to
form the Imperial Bank by passing the Imperial Bank of India Act, 1920. The
bank did not have the right to issue the notes but had the permission to
manage the clearing house and hold Government balances. In 1934, Reserve
Bank of India came into being which was made the Central Bank and had
power to issue the notes and was also the banker to the Government. The
Imperial Bank was given right to act as the agent of the Reserve Bank of India
and represent the bank where it had no braches.
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COMMERCIAL BANKING IN INDIA

In 1955 by passing the State Bank of India 1955, the Imperial Bank was taken
over and assets were vested in a new bank, the State Bank of India..
Bank Nationalization:
After the independence the major historical event in banking sector was the
nationalization of 14 major banks on 19th July 1969. The nationalization was
deemed as a major step in achieving the socialistic pattern of society. In 1980
six more banks were nationalized taking the total nationalized banks to
twenty.

1.3 TYPES OF COMMERCIAL BANKS


COMMERCIAL BANKS
Commercial Banks are banking institutions that accept deposits and grant
short-term loans and advances to their customers. In addition to giving shortterm loans, commercial banks also give medium-term and long-term loan to
business enterprises. Now-a-days some of the commercial banks are also
providing housing loan on a long-term basis to individuals. There are also
many other functions of commercial banks, which are discussed later in this
lesson.
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Types of Commercial banks: Commercial banks are of three types i.e.,


1
2
3

PUBLIC SECTOR BANKS,


PRIVATE SECTOR BANKS,
FOREIGN BANKS

1. Public Sector Banks: These are banks where majority stake is held by the
Government of India or Reserve Bank of India. Examples of public sector
banks are: State Bank of India,Corporation Bank, Bank of Boroda and Dena
Bank, etc.

2. Private Sectors Banks: In case of private sector banks majority of share


capital of the bank is held by private individuals. These banks are registered
as companies with limitedliability. For example: The Jammu and Kashmir
Bank Ltd., Bank of Rajasthan Ltd.,Development Credit Bank Ltd, Lord
Krishna Bank Ltd., Bharat Overseas Bank Ltd.,Global Trust Bank, Vysya
Bank, etc.
3. Foreign Banks: These banks are registered and have their headquarters in a
foreign country but operate their branches in our country. Some of the foreign
banks operating in our country are Hong Kong and Shanghai Banking
Corporation (HSBC), Citibank, American Express Bank, Standard &
Chartered Bank, Grindlays Bank, etc. The number of foreign banks operating
in our country has increased since the financial sector reforms of 1991.

COMMERCIAL BANKING IN INDIA

1.4. OBJECTIVES OF COMMERCIAL BANKS


Commercial banks, as the name implies, are designed to facilitate commerce
by lending money to businesses. Commercial banks typically offer checking
accounts and other money services, such as wire and electronic transfer
services.
1 ) Commercial Lending
Commercial banks lend money to business for various purposes, such as
buying inventory, purchasing equipment and facilitating business operations.
When loans are made to a business, the bank first looks at how it is going to
be repaid. All commercial loan applications must identify a source of
repayment, such as the sale of inventory.
2) Commercial Real Estate Lending
Commercial banks also lend money for the purchase or construction of
commercial real estate, such as shopping centers, office buildings and
warehouses. With real estate, the bank is looking for cash flow generated by
the property as the source of repayment for the loan. Commercial banks do
not knowingly make speculative real estate loans.
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COMMERCIAL BANKING IN INDIA

3) Commercial Transactions
Commercial banks facilitate everyday commerce by cashing and processing
checks, processing credit card transactions and providing deposit accounts for
businesses. The banks use the deposit funds they hold to make the previously
described loans to businesses. Since checking account deposits have little or
no interest rate expense, the banks profit from making loans at a higher rate.
This is known as spread income.
4) Fee Income
Commercial banks earn spread income on the difference between their cost of
deposits and the loan income they receive, but they also earn considerable
income from fees. These are fees are charged for maintaining accounts,
overdraft fees, credit and debit card transaction processing fees, deposit fees
and many other miscellaneous fees.
5) Bank Income
Commercial banks earn spread income on loans and investments and
additional income from fees charged to customers for services and penalties.
Bank expenses include losses on bad loans, maintaining facilities and
personnel costs. Most commercial banks operate profitably but are subject to
sudden loan losses when the economy sours.

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COMMERCIAL BANKING IN INDIA

1.5. THE ROLE AND FUNCTIONS OF


COMMERCIALBANKS
A PRIMARY FUNCTIONS
Accepting Deposits : Commercial bank accepts various types of deposits from
public especially from its clients. It includes saving account deposits,
recurring account deposits, fixed deposits, etc. These deposits are payable
after a certain time period.
Making Advances : The commercial banks provide loans and advances of
various forms. It includes an over draft facility, cash credit, bill discounting,
etc. They also give demand and demand and term loans to all types of clients
against proper security.
Credit creation : It is most significant function of the commercial banks.
While sanctioning a loan to a customer, a bank does not provide cash to the
borrower Instead it opens a deposit account from where the borrower can
withdraw. In other words while sanctioning a loan a bank automatically
creates deposits. This is known as a credit creation from commercial bank.

lending

money

by

overdraft,

installment

loan,

or

other

means

providing documentary and standby letter of credit, guarantees, performance


bonds, securities underwriting commitments and other forms of off balance
sheet exposures
Discounting of Bills:-Banks provide short-term finance by discounting bills,
that is, making payment of the amount before the due date of the bills after
deducting a certain rate of discount. The party gets the funds without waiting
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COMMERCIAL BANKING IN INDIA

for the date of maturity of the bills. In case any bill is dishonoured on the due
date, the bank can recover the amount from the customer.
Overdraft:-Overdraft is also a credit facility granted by bank. A customer who
has a current account with the bank is allowed to withdraw more than the
amount of credit balance in his account. It is a temporary arrangement.
Overdraft facility with a specified limit is allowed either on the security of
assets, or on personal security.

SECONDARY FUNCTIONS OF COMMERCIAL BANKS


Along with the primary functions each commercial bank has to perform
several secondary functions too. It includes many agency functions or general
utility functions. The secondary functions of commercial banks can be
divided into agency functions and utility functions.
Agency Functions : Various agency functions of commercial banks are
To collect and clear cheque, dividends and interest warrant.
To make payment of rent, insurance premium, etc.
To deal in foreign exchange transactions.
To purchase and sell securities.
To act as trusty, attorney, correspondent and executor.
To accept tax proceeds and tax returns.
General Utility Functions : The general utility functions of the commercial
banks include

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COMMERCIAL BANKING IN INDIA

To provide money transfer facility.


To issue traveller'scheque.
To act as referees.
To accept various bills for payment e.g phone bills, gas bills, water bills, etc.
To provide merchant banking facility.
To provide various cards such as credit cards, debit cards, Smart cards, etc.
Besides the primary of accepting deposits and lending money,
banks perform a number of other functions which are called secondary
functions. These are as follows a) Issuing letters of credit, travellerscheques, circular notes etc.
b) Undertaking safe custody of valuables, important documents, and
securities by providing safe deposit vaults or lockers;
c) Providing customers with facilities of foreign exchange.
d) Transferring money from one place to another; and from one
Branch to another branch of the bank.
e) Standing guarantee on behalf of its customers, for making
PAYMENTS for purchase of goods, machinery, vehicles etc.
f) Collecting and supplying business information;
g) Issuing demand drafts and pay orders; and,

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COMMERCIAL BANKING IN INDIA

h) Providing reports on the credit worthiness of customers.

1.6 SPECIAL ROLE OF COMMERCIAL BANKS

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COMMERCIAL BANKING IN INDIA

As said earlier, commercial banks have a special role in India. In fact, many
financial experts even abroad have, of late, been emphasising the special
place that banks hold in their countries also. The "privileged role" of the
banks is the result of their unique features. For example, the liabilities of
banks are money, and, therefore, they are an important part of the payments
mechanism of any country; they also have access to the discount window of
the RBI, call money market (as both borrowers and lenders), and the deposit
insurance. It would be difficult to eliminate such distinctive features of banks
in the near future. There is also an important question as to whether they
should be wiped out, and, if it is done, whether it would not have adverse
consequences on the financial system.

For a financial system to mobilise and allocate savings of the country


successfully and productively, and to facilitate day-to-day transactions, there
must be a class of financial institutions that the public views as safe and
convenient outlets for its savings. In virtually all countries, the single
dominant class of institutions that has emerged to play this crucial role as both
the repository of a large fraction of the society's liquid savings and the entity
through which payments are made is the commercial banks. The structure and
working of the banking system are integral to a country's financial stability
and economic growth.

Bank lending is specially important for companies. The theory of financial


contracting under asymmetric information holds that information-intensive
and information-problematic firms submit to the tight and detailed loan
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COMMERCIAL BANKING IN INDIA

covenants so as to reduce agency costs. They delegate the tasks of monitoring


and renegotiating debt contracts to financial intermediaries because these
tasks are costly and the intermediaries are in a better position to reduce the
costs. Intermediaries are more efficient in monitoring debt contracts because
they are unlikely to free-ride on information-production by others as they
have a larger stake, and they can renegotiate contracts more cheaply than the
dispersed debenture holders. The public bond covenants tend to set their
conditions on events that are relatively easy to verify, viz., a major change in
capital structure or a downgrading of credit rating. In contrast, the
intermediary loan contracts are conditioned by performance measures such as
working capital and net worth which are less easily controlled by the
managers.
Further, the violation of a financial covenant often triggers financial distress.
When this happens, banks can restructure the terms of contracts, viz., wave
covenants, extend maturity, extend more loans, and require more collateral.
Such a flexibility reduces the cost of financial distress. Information
asymmetries and free-riding by bond-holders, on the other hand, may force
the financially distressed firms into inefficient spending cutbacks, and even
bankruptcy. It has been found in the US that the firms' stock prices rise after
an announcement that they have received bank loans, while they fall in
response to announcement of a public bond offering.

Similarly, there are reasons why loans from even other financial institutions
may not be a perfect substitute for bank loans. The economies of scope
between deposit taking and lending give banks an information advantage over

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COMMERCIAL BANKING IN INDIA

finance companies and other financial institutions. The deposit history of


firms may inform banks about the credit risk involved in lending to these
firms. Information on deposits activity may also make it easier for banks to
monitor working capital covenants. The phenomenon of "compensating
balances" can mostly exist only in the case of banks, and not other
institutions. The lending and deposit-taking activities of banks are
complementary, and, go to build up banking relationship which increases the
availability of funds to the firms, which, in turn, enables them to partially
avoid taking more expensive trade credit. Personal relationships are far less
important in borrowing from other financial institutions than from banks.
Moreover, significant differences in collateral requirements exist between
banks and other financial institutions. All such differences effectively segment
the market for business lending, and make bank loans highly unsubstitutable.

The Indian banking system has a very wide reach and deep presence in
metropolises, cities, semi-urban areas, and the remotest corners of the rural
areas with its vast number of branches. It is one of the largest banking
systems in the world. It has been rightly claimed in certain circles that the
diversification and development of the Indian economy are in no small
measure due to the active role banks have played in financing economic
activities of different sectors They have been playing an important role in
developing mutual funds, merchant banks, Primary Dealers, asset
management companies, and debt markets. They operate as issuers, investors,
underwriters, guarantors in financial-markets. By their participation, banks
influence the growth and liquidity of debt markets.

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COMMERCIAL BANKING IN INDIA

They would help in securitisation of debt market. They hold about 60 per cent
of debt stock of government securities, and they account for more than 50 per
cent of the issuance of bonds through public issues and private placements.

Because of such considerations, the important position which banks have


historically come to occupy in India should not be unwittingly destroyed or
undermine in the name of promoting equity culture. Otherwise, monetary
authorities would find it more and more difficult to achieve the goal of
stability of the financial system and of the prices. The banking reforms,
therefore, must aim not only at profitable banking but also at a viable, sound,
safe, and social banking.

1.7 INVESTMENT OF COMMERCIAL BANKS


A)BANKS HAVE FOUR CATEGORIES OF ASSETS:
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COMMERCIAL BANKING IN INDIA

Cash in hand and balances with the RBI,


Assets with the banking system,
Investments in government and other approved securities, and
Bank credit.
Among these assets, investment in cash and government securities serves the
liquidity requirements of banks and is influenced by the RBI policy.
Quantitatively, bank credit and investment in government securities are banks'
most important assets. Commercial banks in India invest a negligible part of
their resources in shares and debentures of joint stock companies. In fact, for
a long time they were discouraged from undertaking such investments.
However, since 2/3 years, the policy in this regard has been liberalised and at
present banks are allowed to invest five per cent of their incremental deposits
in corporate shares and convertible debentures.
Commercial banks' investments are of three types:
(a) Government of India securities;
(b) other approved securities, and
(c) non- approved securities.
While the first two types are known as SLR securities, the third one is known
as non-SLR securities.

INVESTMENT IN SLR SECURITIES


At present, the banks are statutorily required to invest 25 per cent of their
demand and time liabilities in the first two types of securities. The
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COMMERCIAL BANKING IN INDIA

investments in the first type of securities is the major part of banks'


investments. The government securities accounted for 95.59 per cent of their
total investment portfolio in 2002-03. Their investments in the second type
are marginal, while those in the third type are emerging as substantial
investments.
The commercial banks' investments in Central government securities were
28.1 per cent and 31. 6 per cent of their total assets in 2001-02 and 2002-03,
respectively. The other approved securities accounted for hardly one-or two
per cent of the assets of commercial banks in the years just mentioned.
The phenomenon of investments in government securities far in excess of
statutory requirements has been due to
(a) High fiscal deficit effect,
(b) Capital adequacy norms effect,
(c) Foreign exchange sterilisation effect, and
(d) Slack credit demand effect.
All these effects are easy to understand. The fiscal deficit has been largely
financed through public borrowings, and the banks have been the major
subscribers to the government borrowing programme. Similarly, due to
unprecedented and heavy increase in foreign exchange accruals, the RBI has
been carrying out an intensive sterilisationProgramme which has resulted in a
significant increase in the supply of government securities, which the banks
have been purchasing. Further, all scheduled banks are required to maintain
minimum capital to total risk weighted assets ratio which was nine per cent in
2002-03. Given the very-low-risk (risk less) nature of the government
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COMMERCIAL BANKING IN INDIA

securities, banks have preferred to buy and hold substantial amount of


government securities for this purpose also. Finally, due to industrial
recession in the recent past, the industrial sector's credit off take has been
slack, and banks, therefore, have invested their surplus liquidity in
government securities.
Thus, the banks' investments in government securities cannot really be
decided in terms of the ideology of public vs. private sector. The large size of
the State and the attendant enormous volume of government expenditure, the
portfolio management considerations of banks, the accrual of resources to the
banks, foreign capital flows, and demand for credit, have always determined
and will continue to determine the level of investment-deposit ratio of banks.
Hence, it is erroneous to argue, as the RBI has done, that a large recourse of
banks to gilts to invest their resources is a dissipation of "banking knowledge
capital" regarding credit appraisal, or a possibility of severing of the link
between liquidity, credit, money, and economic activity.

INVESTMENT IN NON-SLR SECURITIES


After 1985, there has been a liberalisation of investment norms for banks
which has enabled them to be active players in financial markets. The ambit

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COMMERCIAL BANKING IN INDIA

of eligible investments has been enlarged to cover Commercial Paper (CP)"


units of mutual funds, shares and debentures of PSUs, and shares and
debentures of private corporate sector, which are all known as non-SLR
investments. Similarly, the limit on investments in the capital market has been
gradually increased. Now, banks can invest in equities to the extent of five per
cent of their outstanding (and not incremental as earlier) advances. Effective
May 2001, the total exposure of a bank to stock markets with sub-ceilings for
total advances to all stock brokers and merchant bankers has been limited to
five per cent of the total advances (including CPs) as on March 31 of the
previous year.
The Aggregate balance sheet of SCBs expanded at a higher rate of 19.3%
excluding the impact of conversion of a non-banking entity into a banking
entity since October 1, 2004) during 2004-2005 as compared with 16.2
percent in 2003-04. The ratio of assets of SCBs to GDP at factor cost at
current prices increased significantly to 80% from 78.3% in 2003-04
reflecting further deepening of leverage enjoyed by the banking sector. The
degree of leverage enjoyed by the banking system as reflected in the equity
multiplier declined to 15.8-16.9 in the previous year.

The behavior of major balance sheet indicators show that a divergent during
2004-05. on the back of robust economic growth and industrial recovery,
loans and advances witnessed strong growth, while investment in rising
interest rate scenario, slowed down significantly. Deposits showed a
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COMMERCIAL BANKING IN INDIA

lackluster performance in the wake of increased competition from other


saving instruments. Borrowings and net-owned funds however, increased
sharply underscoring the growing importance of non-deposits resources of
SCBs.
Bank group-wise, assets of new private sector banks grew at the highest rate.
(19.4%),followed by public sector banks(15.1%eacluding the conversion
impact),foreign banks (13.6%) and old private sector banks (10.6%).PSBs
continued to accounts for the major share in he total assets, deposits, advances
and investments of SCBs at end-March 2005, followed distantly by new
private sector banks. The share of foreign banks in total assets and advances
was higher than that of old private sector banks.

DEPOSITS
Deposits of SCBs grew at a lower rate 15.4 per cent (excluding the
conversion impact) during 2004-05 as compared with 16.4 per cent in the
previous year on account of slowdown in demand deposits and savings
deposits. Deceleration in demand deposits was due mainly to the base effect
as demand deposits had witnessed an usually high growth last year. The
growth in demand deposits, however was in line with the long-term average.
Savings deposits, which reflect the strength of the retail liability franchise and
are at the core of the banks customer acquisition efforts grew at a healthy
rate, though the growth was somewhat lower than the high growth of last
year. The higher growth of term deposits was mainly o ac count of NRI
deposits and certificate of deposits (CDs).Excluding these deposits, the
growth rate of term deposits showed a declaration, which was on account of a
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possible substitution in favour of postal deposits and other investments


products, which continued to grow at a high rate benefiting from tax
incentives and their attractive rate of return in comparison with time deposits.

FACTORS AFFECTING COMPOSITION OF BANK


DEPOSITS
The following factors appear to be relevant:
(a) Increase in national income.
(b) Expansion of banking facilities in new areas and for new classes of
people.
(c) Increase of banking habit.
(d) Increase in the relative rates of return on deposits.
(e) Increase in deficit financing.
(f) Increase in bank credit.
(g) Inflow of deposits from Non-Resident Indians (NRIs).
(h) Growth of substitutes.

1.8 COMMERCIAL BANKS AND NATIONALISE


BANKS

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14 banks are nationalised banks in India. There are canarabank,karnataka


bank, state bank of India, Indian bank and many more..
PSU bank-The term public sector banks is used commonly in India. This
refers to banks that have their shares listed in the stock exchanges NSE and
BSE and also the government

of India holds majority stake in these

banks.Eg:-State bank of India.


Commercial bank:- An institution which accepts deposits, makes business
loans, and offers related services. Commercial banks also allow for a variety
of deposit accounts, such as checking, savings, and time deposit. These
institutions are run to make a profit and owned by a group of individuals, yet
some may be members of the Federal Reserve System. While commercial
banks offer

services to individuals, they are primarily concerned with

receiving deposits and lending to businesses. Commercial Banks in India are


broadly categorized into Scheduled Commercial Banks and Unscheduled
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 (60 of the Reserve Bank of India Act, 1934. Eg:-HDFC bank,
ICICI Bank, Federal Bank etc.

1.9 RBI PENALISES 19 COMMERCIAL BANKS

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Srinagar, May 1: The Reserve Bank of India has imposed penalties on 19


commercial banks.
A notification by the central bank, copy of which is available on its site, said
in exercise of the powers vested with it under the provisions of Section
47A(1)
(b) Read with Section 46(4)(i) of the Banking Regulation Act, 1949, the RBI
has imposed penalties on 19 commercial banks.
Some of the banks on whom the penalties have been imposed are ICICI Bank,
HDFC Bank, PNB Paribas, Yes Bank, etc.
The penalties have been imposed for contravention of various instructions
issued by the Reserve Bank in respect of derivatives, such as, failure to carry
out due diligence in regard to suitability of products, selling derivative
products to users not having risk management policies and not verifying the
underlying/ adequacy of underlying and eligible limits under past
performance route, it said.
The notification, a copy of which is with Greater Kashmir, reads: The
Reserve Bank had issued Show Cause Notices to these banks. In response to
this, the banks submitted their written replies. On a careful examination of the
banks written replies and the oral submissions made during the personal
hearings, the Reserve Bank found that the violations were established and the
penalties were thus imposed.

1.10.COMMERCIAL BANKS AND MICROFINANCE

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COMMERCIAL BANKING IN INDIA

Within the spectrum of lower-income population who lack access to financial


services, a distinction can be drawn between the extremely poor and the
economically active poor. The extremely poor are considered to be those
individuals who have insufficient resources to meet defined basic
consumption needs, including people who are not qualified to work (due to
age, health and ethnic origin reasons, among others) or whose income is so
low that they are not able to meet their household basic needs. This group has
prior needs such as food and shelter, and therefore requires tools distinct from
financial services to get out of poverty.
In this regard, Robinson M.S. (2001) asserts: It is sometimes forgotten
although generally not by borrowers that another word for credit is debt.
When loans are provided to the very poor, the borrowers may not be able to
use the loans effectively because they lack opportunities for profitable selfemployment (thus being) unable to repay loan principal and interest.

INCENTIVES AND DISINCENTIVES FOR COMMERCIAL


BANKS ENTRY INTO MF
Banks and financial institutions have been entering the microfinance market
in increasing numbers over the past years. This phenomenon (known as
downscaling), together with that of upgrading, is resulting in a growing
number of formal regulated institutions partially or totally moving into MF.
It is necessary to analyze what drives a traditional banker to engage in MF in
order to fully

understand why downscaling has developed so much

worldwide. There are several factors that motivate the bank to start making
microloans. These factors are related both to the banks internal organization

27

COMMERCIAL BANKING IN INDIA

and to the market in which this bank operates. However, the main incentive is
basically related to the fact that profits are in line with the risks incurred.

Growing competition in markets traditionally served by banks e.g., loans to


big companies, small and medium-sized businesses and consumers along
with the resulting fall in banks returns has encouraged the search for new
market niches. In countries with no experience in MF, there exists an
unattended market segment which may be viewed by banks as a potential
source of rapid growth and positive returns.
Entering a new sector enables banks to diversify their loan portfolio, focusing
on a population segment previously unattended by them. By making loans to
thousands of small borrowers, the micro lending portfolio itself achieves
substantial diversification in terms of number of clients served, although the
level of diversification by activity and geographical area is usually low.
Commercial banks can overcome this obstacle thanks to their branch
networks across the major cities in the country. In addition, the performance
of the micro lending portfolio may have low correlations with traditional bank
business lines due to the very different nature of the clients and activities.
Similarly, having a sector specialized in MF may help commercial banks
improve their public image, as caring for the most disadvantaged social
sectors is welcomed by clients and society in general.

DRIVERS FOR BANK ENTRY INTO MICROFINANCE


28

COMMERCIAL BANKING IN INDIA

Internal Factor

External Factor

Profit

Large microenterpise or lowincome market

Risk diversification

Competition

Excess liquidity

Trend or fad

Image

Regulations

Cross-selling opportunities

Government or donor initiative

Bank leadership

Market pressure on margins

Social responsibility

Desertion of traditional clients

Public relations
Compatibility with bank strategy

ACTIVITIES (GENERALLY) AUTHORIZED BY THE BCRA


TO BE PERFORMED BY COMMERCIAL BANKS AND
FINANCE COMPANIES
1. Stock exchange brokers or dealers operating outside the stock exchange.
networks exploitation and management.
3. Systems for electronic transmission of transactions with institutions and/or
clients.
4. Pension funds management.
5. Mutual fund portfolio management (management company).
6. Issuance of credit/debit and other similar instruments.
7. Closed savings management.

29

COMMERCIAL BANKING IN INDIA

8. Financial assistance through leasing transactions of capital goods, durable


goods and real estate, acquired for such
purpose (leasing) or over credits arising from sales (factoring).
9. Management of public utilities, loan, etc. collection, payment of salaries,
payments to suppliers and fiscal receipt
collection.
10. Services of data processing and/or transmission of information related to
financial activities.
11. Services of credit information for commercial and financial use (financial
record database)
12. Advice on financial and investment issues, and for mergers and/or
acquisitions of companies, provided that this
13. Mutual guarantee companies, acting as protector partner.
14. Funds management and or trusts administration advice as regards
activities consistent with the institution type.
15. Financial trusts fiduciary.
16. Transportation and or custody of

money and securities, including

transport service of mailing and financial


documentation of institutions and or their customers. Associated security
service for local financial institutions. In
both cases, as long as it is a complement of the service provided to the owner
institution/s.
30

COMMERCIAL BANKING IN INDIA

17. Service of securities and book-entry mortgage bond registry officer


18. Service of liquidation of securities operations.
19. Clearing houses.
20. Temporary acquisition of interest in companies in order to facilitate their
development, with the aim of selling the
relevant stock holdings in the future. Financial advice on planning and
managing to such companies.

1.11. TAX REFORM AFFECT COMMERCIAL


BANKS
Iast year, Congress enacted the Tax Reform Act of

1986, which

fundamentally restructures and sim- plifies the federal income tax system.
Beginning in 1987, individuals and corporations face much simpler federal
31

COMMERCIAL BANKING IN INDIA

income tax rules that contain lower marginal tax rates. There is widespread
speculation about the effects of such sweeping federal income tax reform.
Economists, policymakers, and politicians are debating the extent to which
the new tax rules could adversely affect specific economic sectors or groups,
particularly capital-intensive indumies, certain income classes of individual
taxpayers, real estate, and the banking industry. In the commercial banking
industry, the new tax rules will affect banks at a time when the commercial
banking system is undergoing profound structural changes that are eroding the
industry's ability to consistently generate healthy profits on traditional
banking products and services. During the balance of the 1980s and into the
19!90s, commercial banks will face several critical issues, including riskbased capital standards, deregulation, broader geographic competition, and
possibly increasing competition fiom nonbank companies like Sears, Roebuck
and Company, and Merrill Lynch & Co., Inc.

Tax-Exempt Securities. Under the old tax rules, commercial banks could
deduct 80 percent of interest expenses that were incurred to carry taxexempt
securities in their asset portfolios. As a consequence, there was a strong
incentive for commercial banks to hold municipal securities to reduce their
federal tax burden.
The new tax rules disallow 100 percent of the interest charge for carrying
municipal

obligations acquired after August 7 ,

1986. There is one

exception: under the new tax rules, a municipality still will be permitted to
sell up to $10 million of bonds to a financial institution per year, and the

32

COMMERCIAL BANKING IN INDIA

financial institution can apply the old interest expense disallowance rule (20
per- cent) to the bonds.
The old tax law required that a commercial bank determine its bad-debt
reserve deduction for tax purposes by using one of two methods: the
experience method or the percentage method. Under the experience method,
a bank bases its loan-loss deduction on the average loan losses of the previous
six years. Under the percentage method, a bank deducts provisions to a loanloss reserve equal to 0.6 percent of eligible loans outstanding.

1.12 COMMERCIAL BANKS SERVICES PROVIDED


TO THEIR CUSTOMERS
Different modes of Acceptance of Deposits
Banks receive money from the public by way of deposits. The following
33

COMMERCIAL BANKING IN INDIA

types of deposits are usually received by banks:


i) Current deposit
ii) Saving deposit
iii) Fixed deposit26 :: Business Studies
iv) Recurring deposit
v) Miscellaneous deposits
i) Current Deposit
Also called demand deposit, current deposit can be withdrawn by the
depositor at any time by cheques. Businessmen generally open current
accounts with banks. Current accounts do not carry any interest as the amount
deposited in these accounts is repayable on demand without any restriction.
The Reserve bank of India prohibits payment of interest on current accounts
or on deposits up to 14 Days or less except where prior sanction has been
obtained. Banks usually charge a small amount known as incidental charges
on current deposit accounts depending on the number of transaction. Savings
deposit/Savings Bank Accounts Savings deposit account is meant for
individuals who wish to deposit small amounts out of their current income.
It helps in safe guarding their future and also earning interest on the savings.
A saving account c an be opened with or without cheque book f a c i l i ty.
The r e

a r e restrictions on the withdraws from this account. Savings

account holders are also allowed to deposit cheques, drafts, dividend


warrants, etc.drawn in their favour for collection by the bank. To open a

34

COMMERCIAL BANKING IN INDIA

savings account, it is necessary for the depositor to be introduced by a person


having a current or savings account with the same bank.
Fixed deposit
The term Fixed deposit means deposit repayable after the expiry of a
specified period. Since it is repayable only after a fixed period of time, which
is to be determined at the time of opening of the account, it is also known as
time deposit. Fixed deposits are most useful for a commercial bank. Since
they are repayable only after a fixed period, the bank may invest these funds
more profitably by lending at higher rates of interest and for relatively longer
periods. The rate of interest on fixed deposits depends upon the period of
deposits. The longer the period, the higher is the rate of interest offered. The
rate of interest toFunctions of
Commercial Banks :
be allowed on fixed deposits is governed by rules laid down by the
Reserve Bank of India.
Recurring Deposits
Recurring Deposits are gaining wide popularity these days. Under this type of
deposit, the depositor is required to deposit a fixed amount of money every
month for a specific period of time. Each installment may vary from Rs.5/- to
Rs.500/- or more per month and the period of account may vary from 12
months to 10 years. After the completion of the specified period, the customer
gets back all his deposits along with the cumulative interest accrued on the
deposits.

35

COMMERCIAL BANKING IN INDIA

Miscellaneous Deposits
Banks have introduced several deposit schemes to attract deposits from
different types of people, like Home Construction deposit scheme, Sickness
Benefit deposit scheme, Children Gift plan, Old age pensionscheme, Mini
deposit scheme, etc.
Different methods of Granting Loans by Bank
The basic function of a commercial bank is to make loans and advancesout of
the money which is received from the public by way of deposits. The loans
are particularly granted to businessmen and members of the public against
personal security, gold and silver and other movable and immovable assets.
Commercial bank generally lend money in the
following form:
i) Cash credit
ii) Loans
iii) Bank overdraft, and
iv) Discounting of Bills
i) Cash Credit :
A cash credit is an arrangement whereby the bank agrees to lend money to the
borrower upto a certain limit. The bank puts this amount of money to the
credit of the borrower. The borrower draws the money28 :: Business Studies
as and when he needs. Interest is charged only on the amount actually drawn
and not on the amount placed to the credit of borrowers account. Cash credit

36

COMMERCIAL BANKING IN INDIA

is generally granted on a bond of credit or certain other securities. This a very


popular method of lending in our country.
Loans
A specified amount sanctioned by a bank to the customer is called a loan. It
is granted for a fixed period, say six months, or a year. The specified amount
is put on the credit of the borrowers account. He can withdraw this amount in
lump sum or can draw cheques against this sum for any amount. Interest is
charged on the full amount even if theborrower does not utilise it. The rate of
interest is lower on loans in comparison to cash credit. A loan is generally
granted against the security of property or personal security. The loan may be
repaid in lump sum or in installments. Every bank has its own procedure of
granting loans. Hence a bank is at liberty to grant loan depending on its own
resources.
The loan can be granted as:
a) Demand loan, or
b) Term loan
a) Demand loan
Demand loan is repayable on demand. In other words it is repayable at short
notice. The entire amount of demand loan is disbursed at one time and the
borrower has to pay interest on it. The borrower can repay the loan either in
lump sum (one time) or as agreed with the bank. Loans are normally granted
by the bank against tangible securities including securities like N.S.C., Kisan
Vikas Patra, Life Insurance policies and U.T.I. certificates.

37

COMMERCIAL BANKING IN INDIA

Term loans
Medium and long term loans are called Term loans. Term loans are granted
for more than one year and repayment of such loans is spread over a longer
period. The repayment is generally made in suitable instalments of fixed
amount. These loans are repayable over a period of 5 years and maximum up
to 15 years.
Functions of Commercial Banks ::
Term loan is required for the purpose of setting up of new business activity,
renovation, modernisation, expansion/extension of existing units, purchase of
plant and machinery, vehicles, land for setting up a factory, construction of
factory building or purchase of other immovable assets. These loans are
generally secured against the mortgage of land, plant and machinery, building
and other securities. The normal rate of interest charged for such loans is
generally quite high.
Bank Overdraft
Overdraft facility is more or less similar to cash credit facility. Overdraft
facility is the result of an agreement with the bank by which a current account
holder is allowed to withdraw a specified amount over and above the credit
balance in his/her account. It is a short term facility. This facility is made
available to current account holders who operate their account through
cheques. The customer is permitted to withdraw the amount as and when
he/she needs it and to repay it through deposits in his account as and when it
is convenient to him/her. Overdraft facility is generally granted by bank on
the basis of a written request by the customer. Some times, banks also insist
on either apromissory note from the borrower or personal security to ensure
38

COMMERCIAL BANKING IN INDIA

safety of funds. Interest is charged on actual amount withdrawn by the


customer. The interest rate on overdraft is higher than that of the rate on loan.
Discounting of Bills
Apart from granting cash credit, loans and overdraft, banks also grant
financial assistance to customers by discounting bills of exchange. Banks
purchase the bills at face value minus interest at current rate of interest for the
period of the bill. This is known as discounting of bills. Bills of exchange
are negotiable instruments and enable the debtors to discharge their
obligations towards their creditors. Such bills of exchange arise out of
commercial transactions both in internal trade and external trade. By
discounting these bills before they are due for a nominal amount, the banks
help the business community. Of course, the banks recover the full amount of
these bills from the persons liable to make.

1.13 COMMERCIAL BANKING VS. INVESTMENT


BANKING

COMMERCIAL BANKING

39

COMMERCIAL BANKING IN INDIA

A commercial bank may legally take deposits for checking and savings accounts
from consumers. The federal government provides insurance guarantees on these
deposits through the Federal Deposit Insurance Corporation (the FDIC), on
amounts up to $100,000. To get FDIC guarantees, commercial banks must follow a
myriad of regulations.

The typical commercial banking process is fairly straightforward. You deposit


money into your bank, and the bank loans that money to consumers and companies
in need of capital (cash). You borrow to buy a house, finance a car, or finance an
addition to your home. Companies borrow to finance the growth of their company
or meet immediate cash needs. Companies that borrow from commercial banks can
range in size from the dry cleaner on the corner to a multinational conglomerate.
The commercial bank generates a profit by paying depositors a lower interest rate
than the bank charges on loans.

INVESTMENT BANKING
An investment bank operates differently. An investment bank does not have an
inventory of cash deposits to lend as a commercial bank does. In essence, an
investment bank acts as an intermediary, and matches sellers of stocks and bonds
with buyers of stocks and bonds.

40

COMMERCIAL BANKING IN INDIA

Note, however, that companies use investment banks toward the same end as they
use commercial banks. If a company needs capital, it may get a loan from a bank, or
it may ask an investment bank to sell equity or debt (stocks or bonds). Because
commercial banks already have funds available from their depositors and an
investment bank typically does not, an I-bank must spend considerable time finding
investors in order to obtain capital for its client. (Note that as investment banks are
increasingly seeking to become "one-stop" financing sources, many I-banks have
set aside billions of dollars of their own capital that they can use to loan to clients
directly.)

1.14 MAJOR
ADVANTAGES OF COMMERCIAL BANKS
Significance of commercial Banks
The importance of a bank to modern economy, so as to enable them to develop, can
be stated as follow:
41

COMMERCIAL BANKING IN INDIA

(i) The banks collect the savings of those people who can save and allocate them to
those who need it. These savings would have remained idle due to ignorance of the
people and due to the fact that they were in scattered and oddly small quantities. But
banks collect them and divide them in the portions as required by the different
investors.

(ii) Banks preserve the financial resources of the country and it is expected of them
that they allocate them appropriately in the suitable and desirable manner.

(iii) They make available the means for sending funds from one place to another
and do this in cheap, safe and convenient manner.

(iv) Banks arrange for payments by changes, order or bearer, crossed and
uncrossed, which is the easiest and most convenient, Besides they also care for
making such payments as safe as possible.

(v) Banks also help their customers, in the task of preserving their precious
possessions intact and safe.

(vi) To advance money, the basis of modern industry and economy and essential for
financing the developmental process, is governed by banks.

42

COMMERCIAL BANKING IN INDIA

(vii) It makes the monetary system elastic. Such elasticity is greatly desired in the
present economy, where the phase of economy goes on changing and with such
changes, demand for money is required. It is quite proper and convenient for the
government and R.B.I. to change its currency and credit policy frequently, This is
done by RBI, by changing the supply of money with the changing the supply of
money with the changing needs of the public.

Although traditionally, the main business of banks is acceptance of deposits and


lending, the banks have now spread their wings far and wide into many allied and
even unrelated activities.

Banking as an Ancestral Service

For the history of modern banking in India, a reference to the English Agency
Houses in the days of East India Company is necessary. Those agency houses, with
no capital of their own and depending entirely on deposits, were in fact trading
firms carrying on banking as a part of their business and vanished form the scene in
the crises of 1829-32. In the first half of the 19th century, the East India company
established 3 banks The Bank of Bengal in 1809, the Bank of Bombay in 1840 and
the Bank of Madras in 1843.
The Bank of Bengal was given Charter with a capital of Rs.50 Lakhs. This bank
was given powers in different years as to:

(i) Rate of interest was limited to 12%.

43

COMMERCIAL BANKING IN INDIA

(iii) Power to issue currency notes was given in 1824.

(iii) Power to open new branches given in 1839.

(iv) Power to deal in inland exchange was given in 1839.

1. 15 MAJOR
DISADVANTAGES OF COMMERCIAL BANKS
The Disadvanteges are Under:
1. Low performance: When the ownership is in public sector, the employs do not
work for profit and do not there performance and efficiency of the employs remains
poor.
44

COMMERCIAL BANKING IN INDIA

2. Lack of competition: Competition is necessary for development and increasing the


production. Commercial banks has decreased the spirit of competition.
3. Favoritism: The management of commercial bank will provide jobs to there
favored persons because the political leaders have influence upon the state
authorities. Policy of partiality is adopted by the commercial banks.
4. Unbalanced distribution of credit: Agricultural sector is the major sector of the
economy. It should be given top priority in connection with distribution of credit.
After nationalization, balance distribution of credit has not been made.
5. Encourage political monopoly: commercial banks will increase the influence of
politicians over fiscal and monitory structure of country. It will encourage political
monopoly in the country.
6. Increase the burden of the government: Government has to run many sectors of the
economy after commercial banks. There will be an extra burden on the government.
It is in the favor of the nation of that policy of the denationalization should be
adopted.
7. Decrease the process of industrialization: Privatization is necessary for increasing
the process of industrialization. When the banks will be nationalized, they will not
provide credit facility so actively for setting up industrial units in different parts of
the counter.

CHP 2. RESEARCH DESIGN

45

COMMERCIAL BANKING IN INDIA

RESEARCH DESIGN

Primary

Seconday

Books

Telephonic Interview Working Papers

Mail

Survey

Newspaper

Questionnaire

Websites

46

COMMERCIAL BANKING IN INDIA

A Research design is the specification of the method and procedures for acquiring
the information needed.

DATA COLLECTION
There may be different types of information and data. Some of the information may
be published or unpublished, complete or uncomplete, reliable or unreliable, biased
or unbiased, primary or secondary data.

METHODS OF DATA COLLETION


Primary Method:

Primary data are those which are collected a fresh and for the first time and
thus happens to be original in character.
Methods of Primary Research:

Interview Method
Telephone Interview
Mail Survey
Questionnaire

Personal Interview
Personal interview method requires a person known as the interviewer asking
questions generally in a face-to face contact to the other person or persons.
47

COMMERCIAL BANKING IN INDIA

The personal interview of the concerned employee of the bank was conducted
which helped to get a clear idea about the products, pricing, placing,
promotion of different banks. The interview was conducted with the help of
structured questionnaires containing open and close end questions give more
scope for quantitative and qualitative information for better conclusion.
Secondary Method:Secondary data means data that are already available i.e. they refer to the data
which have already been collected and analyzed by some else. Published
secondary data was used to get an overall idea about the growth of service
marketing in banking sector after globalization with the help of sources like:

Books
News Paper
Web sites

Secondary research or desk is so called because it is usually with the use of


secondary data or information that is already available. This means such data
have already been-collected and analyzed by someone else. Such information
has not been gathered afresh specially for any research project. This
48

COMMERCIAL BANKING IN INDIA

information is inclusive of a wide range of materials-Book, Magazine, and


Web-sites, Company reports, Government statistics. Newspapers and Journal
articles to reports worked out by commercial market research agencies.
Books were used to get more information to know about the concepts of
Banking Activities. Magazines were referred to take the case studies on
current scenario of Banks & development of Jammu and Kashmir Bank.

CHAP.3 CASE STUDY ON COMMERCIAL BANK

COMPANY PROFILE
49

COMMERCIAL BANKING IN INDIA

Established in 1975, The Commercial Bank of Qatar is Qatar-based bank with


capital reserves of over QR 3.5 billion and total assets book of QR 35 billion.
The Bank offers investment, corporate and retail services through its 23
branches, sales offices/pavilions, many ATMs and deposit machines
throughout Qatar.
THE SOLUTION
G-Cube offered the solution in the form of Wizdom Web LMS that had
following features:
Integrated LMS with existing portal and LDAP server
Very intuitive interface to upload and manage courses
Commercial Bank of Qatar has a large workforce spread across the country.
Training the workforce through extremely user-friendly technology to keep
their skills updated was the requirement of the client. To implement effective
training anytime, anywhere, the Bank chose to use Wizdom Web Learning
Management System. The bank not only required an easy-to-use system, it
also had some specific requests The LMS had to integrate with the Banks existing portal, and had to be
customized to provide seamless experience to users, as well as Administrative
staff
The bank required the Wizdom Web LMS to be integrated with the LDAP
server for single sign-in facility.

THE SOLUTION
G-Cube offered the solution in the form of Wizdom Web LMS that had
following features:
50

COMMERCIAL BANKING IN INDIA

Integrated LMS with existing portal and LDAP server


Very intuitive interface to upload and manage courses
Single sign-on functionality when logging in from Intranet, and a secure
environment to logon from Internet
Comprehensive reports to track learner progress
Completely scalable to meet clients future growth requirements.
THE BENEFITS
The implementation of the Wizdom LMS was a breakthrough step for The
Commercial Bank of Qatar due to its easy and anywhere usability. Wizdom
Web LMS gave the following benefits to The Commercial bank of Qatar:
Single sign on for the users, preventing them from the hassle of signing in
multiple times
Providing consistent look and feel across the portals
Empowering users to learn from anywhere, anytime be it the Intranet or
Internet
Centralized reporting enabled HR to track learner progress and feedback in
real time, and
enhance their courses to make them more effective .

CHAP.4. SUMMARY OF COMMERCIAL BANKS IN


INDIA
The Indian banking industry started taking shape after Indias independence
in 1947. Though the Indian banking industry can be traced as far back as 1806
51

COMMERCIAL BANKING IN INDIA

with the establishment of Bank of Bengal, the industry was in a state of


turmoil.
Under the British influence, Calcutta witnessed a surge in trading activities,
giving rise to a number of banking establishments during the period. Several
banks, set up in order to finance trading, went out of business. For instance,
Union bank, formed by Indian merchants, failed due to economic recession
during 1848-49 resulting in depositors losing money. Such events resulted in
shifting the reigns of the industry into the hands of Europeans till the early
twentieth century.
From 1906 to1911, several banks were set up based on the principles of the
Swadesi movement. The movement inspired Indian businessmen and
politicians to set up banks for the Indian community and many new banks
were launched to promote trade and finance in communal groups. Some of the
prominent ones among these are Bank of India, Corporation Bank, Bank of
Baroda, Indian bank, Canara Bank, and Central bank of India.
Bank of Bengal, along with its sister banks, Bank of Bombay and Bank of
Madras, set up by British East India Company, merged in 1921 to give birth to
Imperial bank of India, now known as State bank of India.
During 1914-1945, India went through several ups and downs politically and
economically and the effects were felt in the banking sector too. The World
Wars disrupted banking activities of the nation and almost 94 banks failed
during this period. After 1947, however, banking activities flourished.
After the partition of India, the government toook drastic steps to regulate the
banking industry. For example, in 1948, additional powers and authority were
vested in the Reserve bank of India to monitor the functioning of the entire
banking system. The passing the Banking regulation act in 1949, empowered
RBI to further regulate, inspect, and control Indian banks.

The nationalization and liberalization of banks 1969 and 1991 respectively


also boosted the development of the Indian banking sector. Nationalization
resulted in 91% of government holding in the banking industry and
52

COMMERCIAL BANKING IN INDIA

liberalization paved the path for private players to participate in the industry.
As a result, banks like Oriental bank of Commerce, HDFC bank, ICICI bank,
and AXIS bank came into being. Foreign banks too were permitted to set up
their offices in India. The rationalization of FDI norms in 2002 also allowed
foreign players to acquire stakes in Indian banks.
These banks implemented innovative forms of banking like ATMs, mobile
banking, phone banking, internet banking, and debit/credit cards. The private
players constantly improved services in order to retain customers and win the
severe competition which had become a feature of the Indian banking
industry.

Currently, private banks are going through a series of mergers and


acquisitions and public sector banks are shrinking in the form of manpower,
equity, and non-performing assets.

The public sector banks have been grappling with attrition which surfaced
after the Voluntary Retirement Scheme was announced. The dilution of equity
from 51% to 33% has opened up opportunities for takeovers.

The Indian banking system, however, proved resilient to shocks arising out of
the global financial recession. In terms of quality of assets, the Indian banking
players have come out clean with strong and transparent balance sheets
compared to their counterparts in other nations.

Following the financial crisis, new deposits made their way towards public
sector banks. According to RBI's 'Quarterly Statistics on Deposits and Credit
of Scheduled Commercial Banks: September 2009', nationalized banks, as a
group, accounted for 50.5% of the aggregate deposits, while State Bank of
India (SBI) and its associates accounted for 23.8%. The share of other

53

COMMERCIAL BANKING IN INDIA

scheduled commercial banks, foreign banks and regional rural banks in


aggregate deposits were 17.8%, 5.6%, and 3%, respectively.

Ever since US declared recovery from the global financial crisis, the
confidence of non-resident Indians (NRIs) in the Indian economy has revived
again. NRI fund inflows increased since April 2009 and touched US$ 45.5
billion on July 2009, as per the RBI's February bulletin. Most of this has come
through Foreign Currency Non-resident (FCNR) accounts and Non-resident
External Rupee Accounts. India's foreign exchange reserves rose to US$
284.26 billion as on January 8, 2010, according to the RBI's February
bulletin.

The report also found that scheduled commercial banks served 34,709 banked
centers. Of these centers, 28,095 were single office centers and 64 centers had
100 or more bank offices.

The expansion plans are self evident from the example of SBI, which is
adding 23 new branches abroad, bringing its foreign-branch network number
to 160 by March 2010. This will cement its leading position as the bank with
the largest global presence among local peers.

Currently, the Indian banking framework is comprised of 88 scheduled


commercial banks (SCBs) - 28 public sector banks (that is with the
Government of India holding a stake), 29 private banks (these do not have
government stake, they may be publicly listed and traded on stock exchanges)
and 31 foreign banks. They have a combined network of over 53,000
branches and 17,000 ATMs. According to a report by ICRA Limited, a rating
agency, the public sector banks hold over 75 percent of total assets of the
banking industry, with the private and foreign banks holding 18.2% and 6.5%
respectively.

54

COMMERCIAL BANKING IN INDIA

In its platinum jubilee year, the RBI, the central bank of the country, in a
notification issued on June 25, 2009, said that banks should link more
branches to the National Electronic Clearing Service (NECS). NECS was
introduced in September 2008 for centralized processing of repetitive and
bulk payment instructions. Currently, a little over 26,000 branches of 114
banks are enabled to participate in NECS.

Currently the banking industry looks optimistic in terms of strong inflow of


funds. This could be supported by the declaration made by RBI in 2009.
According to the RBI, the stance of monetary policy for the remaining period
of 2009-10 will be to:

Anchor inflation expectations and keep a vigil on inflation trends and respond
swiftly through policy adjustments,
Actively manage liquidity to ensure credit demands of productive sectors are
met adequately,
Maintain an interest rate environment consistent with financial stability and
price stability.
The money supply growth on a year-on-year basis at 18.9% as on October 9,
2009, remained above the indicative projection of 18% set out in the First
Quarter Review of July 2009. The main source of the expansion was bank
credit to the government, reflecting large market borrowings of the
government.

CHAP.5 CONCLUSION
a commercial bank is a bank that operates with a profit-earning goal ie a business
bank while a non-commercial bank is a financial institution that operates with the
aim of alleviating. banking on the development of bank-customer relationships
in the value creation process.
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COMMERCIAL BANKING IN INDIA

Banks are financial institutions that can make or break an economy. Unsupervised
and uncontrolled behavior from banks can spell doom to the economy and for the
customers as well. Hence central banks...
banks are the regular banks that provide basic banking facilities to its customers.
Some of the facilities you can get from a commercial bank are:a. Checking/Current
account. Savings..
commercial banks or universal banks constitute twelve (12) financial institutions,
considered as one-stop commercial banks performing com-banking functions and
non-related banking activities
financial institutions that can make or break an economy. Unsupervised and
uncontrolled behavior from banks can spell doom to the economy and for the
customers as well. Hence central banks.

QUESTIONNAIRE
ANNEXURE
Dear sir/Madam,

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COMMERCIAL BANKING IN INDIA

Name:-

.............................................................................................................

..
Address:-.............................................................................................................
..............
.............................................................................................................................
Gender
Male
Female

Household income level


Less than $25000
$25001 - $50000
$50000 - $100000
More than $100000

1) How satisfied are you with the service you received?


excellent

57

COMMERCIAL BANKING IN INDIA

very good
neutral
poor
very poor

2) How likely are you to recommend our service to others Banks??


yes
maybe
no
3) Which type of account do you have in commercial bank?
Saving Account
Current Account
Demat Account

4)

Which type of services you have ever used ?


NRI Banking
Forex Trade

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COMMERCIAL BANKING IN INDIA

Investment and Insurance


Cards
5)

Is the commercial banks are better than co-operative banks?


Yes

6)

Is the commercial banks are better than co-operative banks?


Yes
No

7) Would you like any suggestions and improvement in commercial


banking services ?
...............................................................................................................
................................................................................................................
................................................................................................................

BIBILOGRAPHY
BOOKS

59

COMMERCIAL BANKING IN INDIA

Jensen M. C. and Meckling W. H. (1979), Rights and Production Functions: An


Application to Labour Managed Firms and Codetermination, Journal of Business,
52 (4), 469-506.
Jondrow J., Lovell C. A. K., Materov I. S. and Schmidt P. (1982), On the
estimation of technical inefficiency in the stochastic frontier production function
model, Journal of Econometrics, 19, 233-238.
Hansmann H. (1988), Ownership of the firm, Journal of Law, Economics and
Organization, 4,267-304.
Hansmann H. (1996), The ownership of enterprise, Cambridge (MA), Harvard
University Press. Holmstrom B. (1999), The firm as a subeconomy, Journal of Law,
Economics and Organization,15 (1), 74-102.
Holmstrom B. and Milgrom P. (1994), The firm as an incentive system, American
Economic Sealey C. W. and Lindley J. T. (1977), Inputs, Outputs and a Theory of
Production and Cost at Depository Financial Institutions, Journal of Finance, 32,
1251-1266.
Building Inclusive Financial Sector for Development. The Blue Book.

WEBSITES
www.scribd.com
www.managementparadise.com
www.commercialbankindia.com

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