Overview of Commercial Banks

Generally, bank means commercial bank from the ancient period. These banks function primarily as deposit
takers and lenders to trade and commerce. Modern banking systems have been originated through the
development of commercial bank. For this reason, many scholars consider commercial bank is the “Mother of
modern bank”.

C
ommercial Banks refers to the financial institutions that do business with money for making profit. In
other words, it include financial institutions that conduct banking business for profit motive by accepting
public deposit for various investment purpose.
Nusrat Jahan
According to Prof. Gilbert, #102
"A commercial bank is a dealer in capital or more property a dealer in money. He is intermediate party between
the borrower and the lender. He borrows from one party and lends to another and the difference between the
terms at which he borrows and those at which he lends from the source of his profit.”

According to Prof. F.R.S. Sayers,

‘‘Banks are not merely traders in money but also important manufactures of money.’’
Commercial bank is a profit-making institution that holds the deposits of individuals and businesses in checking
and savings accounts and then uses these funds to make loans to individuals, businesses, and the government.
From the analysis of above definitions, it can be said that.
 Commercial banks are the financial intermediary or dealer in capital and money
 They collect deposits on current account, savings account, and fixed account from people
 They lend money to different people and organizations in various forms at a higher rate of interest
 They honor the customers’ cheques
 The main purpose of this bank is to earn profit.
 Now -a-days these banks also conduct foreign exchange business.
In most countries, central banks are responsible for the oversight of the commercial banking system of their
respective countries. They will impose a number of conditions on the banks that they regulate such as keeping
bank reserves and to maintain minimum capital requirements

#Types of Commercial Banks & Bangladesh’s perspective:

Nationalized
6
After the independence, banking industry in Bangladesh started its journey with 6 Nationalized commercialized
banks, 2 State owned Specialized banks and 3 Foreign Banks. In the 1980's banking industry achieved significant
expansion with the entrance of private banks. Now, banks in Bangladesh are primarily of two types:

Scheduled Banks: The banks which get license to operate under Bank Company Act, 1991 (Amended upto
2013) are termed as Scheduled Banks.

Non-Scheduled Banks: The banks which are established for special and definite objective and operate under
the acts that are enacted for meeting up those objectives, are termed as Non-Scheduled Banks. These banks cannot
perform all functions of scheduled banks.

There are 57 scheduled banks in Bangladesh who operate under full control and supervision of Bangladesh Bank
which is empowered to do so through Bangladesh Bank Order, 1972 and Bank Company Act, 1991. Scheduled
Banks are classified into following types:

State Owned Commercial Banks (SOCBs): There are 7 SOCBs, which are fully or majorly owned by
the Government of Bangladesh.

1. Sonali Bank Ltd.

2. Janata Bank Ltd.
3. Agrani Bank Ltd.
4. Rupali Bank Ltd.
5. Bangladesh Development Bank Limited.
6. Basic Bank Limited

Specialized Banks (SDBs): 2 specialized banks are now operating which were established for specific
objectives like agricultural or industrial development. These banks are also fully or majorly owned by the
Government of Bangladesh.
1. Bangladesh Krishi Bank
2. RAKUB.

Private Commercial Banks (PCBs): There are 40 private commercial banks, which are majorly owned
by the private entities. PCBs can be categorized into two groups:

Conventional PCBs: 32 conventional PCBs are now operating in the industry. They perform the banking
functions in conventional fashion i.e. interest based operations.

1. AB Bank Limited 14. Midland Bank

2. Bangladesh Commerce Bank Limited 15. Modhumoti Bank Limited
3. Bank Asia Limited 16. Mutual Trust Bank Limited
4. Bengal Bank Limited 17. National Bank Limited
5. BRAC Bank Limited 18. National Credit & Commerce Bank Limited
6. City Bank Limited 19. NRB Bank Limited
7. Dhaka Bank Limited 20. NRB Commercial Bank Limited
8. Dutch-Bangla Bank Limited 21. One Bank Limited
9. Eastern Bank Limited 22. Premier Bank Limited
10. IFIC Bank Limited 23. Prime Bank Limited
11. Jamuna Bank Limited 24. Pubali Bank Limited
12. Meghna Bank Limited 25. South Bangla Agriculture & Commerce
13. Mercantile Bank Limited Bank Limited
 26. Southeast Bank Limited 30. United Commercial Bank Limited
27. Standard Bank Limited 31. Uttara Bank Limited
28. The Farmers Bank Limited 32. Shimanto Bank Ltd
29. Trust Bank Limited

Islami Shariah based PCBs: There are 8 Islami Shariah based PCBs in Bangladesh and they execute
banking activities according to Islami Shariah based principles i.e. Profit-Loss Sharing (PLS) mode.

1. Al-Arafah Islami Bank Limited 5. Islami Bank Bangladesh Limited

2. EXIM Bank Limited 6. Shahjalal Islami Bank Limited
3. First Security Islami Bank Limited 7. Social Islami Bank Limited
4. ICB Islamic Bank Limited 8. Union Bank Limited

Foreign Commercial Banks (FCBs): 9 FCBs are operating in Bangladesh as the branches of the banks
which are incorporated in abroad.

1. Bank Al-Falah Limited 6. Standard Chartered Bank

2. Citibank N.A 7. State Bank of India
3. Commercial Bank of Ceylon PLC 8. Woori Bank
4. Habib Bank Limited 9. HSBC
5. National Bank of Pakistan

There are now 6 Non-Scheduled Banks in Bangladesh which are:

1. Ansar VDP Unnayan Bank,
2. Karmashangosthan Bank,
3. Grameen Bank,
4. Jubilee Bank,
5. Probashi Kollyan Bank,
6. Palli Sanchay Bank

#Functions and Services of Commercial Banks:

 Primary Functions/Services
1. Accepting Deposits
2. Creating Lending 1. Funded 2. Non-funded

 Secondary Functions/Services
1. Agency Function
2. Utility Function

Primary Functions/Services:
These functions are responsible for bank origination. Banks are obliged to perform these functions. If any
commercial bank does not give the opportunity to open account or give loan to anyone without proper reason,
the customer can take legal action against respective bank.

Accepting Deposits: The most important function of commercial banks is to accept deposits from the public
in an attractive & cost-effective way. Various sections of society, according to their needs and economic
condition, deposit their savings with the banks. For example, fixed and low-income group people deposit their
savings in small amounts from the points of view of security, income, and saving promotion. On the other hand,
traders and businesspersons deposit their savings in the banks for the convenience of payment.

Therefore, keeping the needs and interests of various sections of society, banks formulate various deposit
schemes. Generally, there are three types of deposits, which are as follows:

(i) Current Deposits: The depositors of such deposits can withdraw and deposit money whenever they desire.
Since banks have to keep the deposited amount of such accounts in cash always, they carry either no interest or
very low rate of interest. These deposits are called as Demand Deposits because these can be demanded or
withdrawn by the depositors at any time they want. Such deposit accounts are highly useful for traders and big
business firms because they have to make payments and accept payments many times in a day.

(ii) Fixed Deposits: These are the deposits which are deposited for a definite period of time. This period is
generally not less than one year and, therefore, these are called as long term deposits. These deposits cannot
be withdrawn before the expiry of the stipulated time and, therefore, these are also called as time deposits.
These deposits generally carry a higher rate of interest because banks can use these deposits for a definite time
without having the fear of being withdrawn.

(iii) Saving Deposits: In such deposits, money upto a certain limit can be deposited and withdrawn twice in
a week. On such deposits, the rate of interest is very less. As is evident from the name of such deposits their main
objective is to mobilize small savings in the form of deposits. These deposits are generally done by salaried
people and the people who have fixed and less income.

Lending: The second important function of a commercial bank is to grant loans and advances. Banks operate
their lending functions in two ways. Such as, funded & non-funded lending.

Features of Fund based lending:

 Direct form of lending with actual cash outflow.
 Affects banks’ balance sheet in boh ways
 Backed by primary and/or collateral security.
 Used for financing capital goods and/or working capital requirements etc. mainly.

Forms of Fund Based Lending:

 Loans  Loans Against Import Bills
 Cash Credit  Loans Against Imported Merchandise
 Overdraft  Packing Credit
 Bills Discounted
Fund based facilities may be disbursed for Working Capital Finance, Project Finance, Loans to Small and
Medium Enterprises and Retail Lending (Credit Card, Home Loan, Car Loan, Personal Loans etc.)

Loans: Loans and advances are given to members of the public and to the business community at a higher rate
of interest than allowed by banks on various deposit accounts. The rate of interest charged on loans and advances
varies depending upon the purpose, period and the mode of repayment. The difference between the rate of interest
allowed on deposits and the rate charged on the Loans is the main source of a bank’s income. A loan is granted
for a specific time. Generally, Commercial banks grant short-term loans. However, term loans, that is, loan for
more than a year, may also be granted. The borrower may withdraw the entire amount in lump sum or in
installments. However, interest is charged on the full amount of loan. Loans are generally granted against the
Security of certain assets. A loan may be repaid either in Lump sum or in installments. The banks grant loan to
clients against the security of assets so that, in case of default, they can recover the loan amount. The securities
used against the bank loan may be tangible or intangible, such as goodwill, assets, inventory, and documents of
title of goods.
Cash Credit: Cash credit is an arrangement whereby the bank allows the borrower to draw amounts upto a
specified limit. Under this set up banks open accounts of their customers and the amount is credited to the account
of the customer. With this type of loan, credit is created. The customer can withdraw this amount as and when
he requires. Interest is charged on the amount actually withdrawn. Cash Credit is granted as per agreed terms and
conditions with the customers.

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.
A business overdraft is an ideal source of temporary funding when business expenses are unpredictable. The
benefits of business overdraft facilities are Convenient, flexible working capital finance, matched to your specific
borrowing requirement. For this banks demand a security from the customers and charge very high rate of interest.

Discounting of Bill: Discounting of bill is a process of settling the bill of exchange by the bank at a value
less than the face value before maturity date. According to Sec. 126 of Negotiable Instruments, “a bill of exchange
is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring
the person to whom it is addressed to pay on demand or at fixed or determinable future time a sum certain in
money to order or to bearer.” The facility of discounting of bill is used by the organizations to meet their
immediate need of cash for settling down current liabilities. 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 for the date of maturity of the bills. In case any bill is
dishonored on the due date, the bank can recover the amount from the customer.

Conditions laid down by the bank for discounting of bill are as follows:
a. Must be intended to specific purpose
b. Must be enclosed with the signature of the two persons (company, bank or reputed person)
c. Must be less than the face value
d. Must be produced before the maturity period.

Loans against Import Bills: An import Loan is a short-term cash advance that enables the customer as an
importer to meet the immediate payment obligations under a Letter of Credit presentation or Import Documentary
Collection. Under such arrangements, bank finances the customer’s import commitments by making payment
against the Letter of Credit or Documentary Collection and receives payment from the customer at a pre-
determined date in the future. Here, the credit period between the time that the bank provides finance and the
time the customer repays the bank, should be sufficient for the customer to either manufacture goods for final
sale or for direct sale to end buyers.

Loan against Imported Merchandize (LIM): Loan against Imported Merchandise (LIM) is a facility
provided by the bank to the importers who are in shortage of fund to clear the goods from the port authority. This
type of finance is offered to the importer to finance their needs for meeting the cost including freight, insurance,
and customs and excise duty payable on the imported merchandise. The lending bank mostly pledges the imported
goods. The merchandise is released for the use of the importer (borrower) upon repayment of the banks finance
and charges either fully or partially, on production of the Delivery Order issued by the banker in favor of the
borrower.

Packing credit: Generally, importers are not ready to advance payments to exporters, as it is not secure and
full of risk for them. In such scenarios, the facility of export packing credit supports the exporter’s supply chain
and provides them funds to bridge the gap until the final payment. The bank issuing the packing credit will usually
advance the partial or full proportion of the invoice, depending on the assumed risk. The advance is provided to
purchase raw materials, process, manufacture, pack, market and transport the required goods and services. The
packing credit is especially very viable for exporters who export goods overseas as it has a more flexible
repayment plans than the usual bank loans. The loan can be granted in either the exporter’s currency or another
easily convertible currency mutually decided by both the exporter and the lending bank.

Non-Fund-based Lending: Non fund based lending, where the lending bank does not commit any
physical outflow of funds. The funds position of the lending bank remains intact.
 Letter of Credit
 Guarantee

Letter of credit: A letter of credit is a letter from a bank guaranteeing that a buyer's payment to a seller will
be received on time and for the correct amount. In the event that the buyer is unable to make payment on the
purchase, the bank will be required to cover the full or remaining amount of the purchase. Due to the nature of
international dealings, including factors such as distance, differing laws in each country, and difficulty in
knowing each party personally, the use of letters of credit has become a very important aspect of international
trade.
Bank Guarantees: Bank Guarantee is a non-fund based lending given by the bank to ensure that the liabilities
of a debtor will be met. This facility enables the customer to acquire goods, buy equipment, and thereby expand
business activity.

Secondary Functions of Banks:

The bank performs a number of secondary functions, also called as non-banking functions. These are additional
not forcible activities of banks that’s why customer can’t take legal actions against banks if they don’t perform
these activities. The important secondary functions of banks are explained below.

1. Agency Functions: The bank acts as an agent of its customers. The bank performs a number of agency
functions, which includes-

a. Transfer of Funds: The bank transfer funds from one branch to another or from one place to another.

b. Collection of Cheques: The bank collects the money of the cheques through clearing section of its customers.
The bank also collects money of the bills of exchange.

c. Periodic Payments: On standing instructions of the client, the bank makes periodic payments in respect of
electricity bills, rent, etc. Banks pay insurance premium of their customers. Besides this, they also deposit loan
installments, income tax, interest etc. as per directions.

d. Portfolio Management: The banks also undertakes to purchase and sell the shares and debentures on behalf of
the clients and accordingly debits or credits the account. This facility is called portfolio management.

e. Periodic Collections: The bank collects salary, pension, dividend, and such other periodic collections on behalf
of the client.
f. Issue of Drafts and Letter of Credits Banks issue drafts for transferring money from one place to another. It
also issues letter of credit, especially in case of, import trade.

g. Other Agency Functions They act as trustees, executors, advisers and administrators on behalf of its clients.
They act as representatives of clients to deal with other banks and institutions.

2. Utility Functions: The bank also performs general utility functions, such as-
a. Locker Facility: The bank provides a locker facility for the safe custody of valuable documents, gold ornaments
and other valuables.

b. Underwriting of Shares: The bank underwrites shares and debentures through its merchant banking division.

c. Dealing in Foreign Exchange: The commercial banks are allowed by BB to deal in foreign exchange.

d. Project Reports: The bank may also undertake to prepare project reports on behalf of its clients.

e. Social Welfare Programs: It undertakes social welfare programs, such as adult literacy programs, public
welfare campaigns, etc.

f. Other Utility Functions: It acts as a referee to financial standing of customers. It collects creditworthiness
information about clients of its customers. It provides market information to its customers, etc. It provides
travelers’ cheques facility.

g. Electronic Banking: Include services, such as debit cards, credit cards, and Internet banking.

Roles of Commercial Banks in Economic Development:

The banking sectors has now formed one of the pillars in economic prosperity. Over the time, banks have formed
an important part in providing an avenue for both savings and investments. Land, Labour, Capital and
entrepreneurs are the basic and core resources available to each business. However, to make the use of resources,
a business is required finance to purchase land, hire labour, payment for capital goods and pay for individuals
with specialized skills. So, there are some important roles of commercial banks in economic development, as
follow:

1. Capital Formation: Banks play an important role in capital formation, which is essential for the economic
development of a country. They mobilize the small savings of the people scattered over a wide area through their
network of branches all over the country and make it available for productive purposes. Now-a-days, banks offer
very attractive schemes to attract the people to save their money with them and bring the savings mobilized to
the organized money market . If the banks do not perform this function, savings either remains idle or used in
creating assets, which are low in scale of plan priorities.

2. Channelizing the Funds to Productive Investment: Banks invest the savings mobilized by them
for productive purposes. Capital formation is not the only function of commercial banks. Pooled savings should
be distributed to various sectors of the economy with a view to increase the productivity of the nation. Then only
it can be said to have performed an important role in the economic development of the nation. It ensures fuller
utilization of resources.

3. Trade Development: The commercial banks provide capital, technical assistance and many other facilities
to the business owners for according to their needs, which leads to development in trade. Development of trade
always pay a good impact on economic development of a country and on its growth too.
4. Agriculture Development: Commercial banks of the country finance the most important sector of the
developing economies i.e. agriculture. Short, medium are provided for the purchase of seeds and fertilizer,
installation of tub wells, construction of ware houses and purchase of tracker etc.

5. Credit Creation: Commercial banks are called the factories of credit. They advance much more than
they collect from people in the form of deposits. Through the process of credit creation, commercial banks
provide finance to all the sectors of the economy thus they making them more developed than before. Credit
creation leads to increased production, employment, sales and thereby they cause faster economic development.

6. Encouraging Right Type of Industries: The banks help in the development of the right type of
industries by extending loan to right type of persons. In this way, they help not only for industrialization of the
country but also for the economic development of the country. They grant loans and advances to manufacturers
whose products are in great demand. The manufacturers in turn increase their products by introducing new
methods of production and assist in raising the national income of the country.

7. Bank Rate Policy/Help in Monetary Policy: The commercial banks help the economic development
of a country by faithfully following the monetary policy of the central bank. In fact, the central bank depends
upon the commercial banks for the success of its policy of monetary management in keeping with requirements
of a developing economy.

Economists are of the view that by changing the bank rates, changes can be made in the money supply of a
country. In our country, the BB regulates the rate of interest to be paid by banks for the deposits accepted by
them and also the rate of interest to be charged by them on the loans granted by them.

8. Bank Monetize Debt: Commercial banks transform the loan to be repaid after a certain period into cash,
which can be immediately used for business activities. Manufacturers and wholesale traders cannot increase
their sales without selling goods on credit basis. But credit sales may lead to locking up of capital. As a result,
production may also be reduced. As banks are lending money by discounting bills of exchange, business
concerns are able to carryout the economic activities without any interruption.

10. Finance to Government: Government is acting as the promoter of industries in underdeveloped

countries for which finance is needed for it. Banks provide long-term credit to Government by investing their
funds in Government securities and short-term finance by purchasing Treasury Bills.

11. Bankers as Employers: After the privatization banks, banking industry has grown to a great extent in
our country. Bank’s branches are opened in almost all the villages, which leads to the creation of new
employment opportunities.

12. Contribute to Export-Import: Commercial banks help the traders of two different countries to
undertake business. Letter of credit is issued by the importer’s bank to the exporters to ensure the payment.

Resource Ref:
 Class lecture & Slide given by Anam Sir

 Bank Management and Financial Services, Fifth Edition- Peter Rose (Chapter-01)

 Trends 9 (On going issues) affecting all banks (19-23 pages)

 Bangladesh Bank website