Commercial Banking Operations:

The term “commercial bank” refers to a financial institution that accepts deposits, offers
checking account services, makes various loans, and offers basic financial products like
certificates of deposit (CDs) and savings accounts to individuals and small businesses.
A commercial bank is where most people do their banking.

Commercial banks make money by providing and earning interest from loans such as
mortgages, auto loans, business loans, and personal loans. Customer deposits provide
banks with the capital to make these loans.

Top Commercial Banks in the Philippines:

TYPES OF COMMERCIAL BANKS

There are three different types of commercial banks.

Private bank
It is a type of commercial banks where private individuals and businesses own a
majority of the share capital. All private banks are recorded as companies with limited
liability. Such as Housing Development Finance Corporation (HDFC) Bank, Industrial
Credit and Investment Corporation of India (ICICI) Bank, Yes Bank, and more such
banks.

Public bank
It is a type of bank that is nationalised, and the government holds a significant stake.
For example, Bank of Baroda, State Bank of India (SBI), Dena Bank, Corporation Bank,
and Punjab National Bank.

Foreign bank
These banks are established in foreign countries and have branches in other
countries. For instance, American Express Bank, Hong Kong and Shanghai Banking
Corporation (HSBC), Standard & Chartered Bank, Citibank, and more such banks.
ADVANTAGES and DISADVANTAGES of COMMERCIAL BANKS in MODERN
ECONOMY
Advantages of Commercial Bank
• Savings
• Safe Keeping of Public Wealth
• Provision of Loans
• Financial Prudence Advice
• Facilitation of Business Transactions and Payment
• Facilitation of Global Trade
• Reference
• Conversion of Digital currency

Disadvantages of Commercial Banks

• Leakages
• Risk of Robbery and Fraud
• Bankruptcy
• Incumbrance Process of Getting Loans

Management
Mostly it deals with the management of deposits, lending activities, investments,
bank capital, bank liquidity and off-balance sheet activities. It also covers the use
of derivatives and asset backed securities such as credit derivatives etc. to manage the
market risk.

Function of Commercial Bank:

Accept deposits − Receiving money from individuals and enterprises known as
depositors.

Dispense payments − Making payments according to the convenience of the depositors.

For example, honoring a check.

Collections − Bank plays as an agent to collect funds from another banks receivable to
the depositor. For example, when someone pays through check drawn on an account
from a different bank.

Invest funds − Contributing or spending money in securities for making more money.
For example, mutual funds.

Safeguard money − A bank is regarded as a safe place to store wealth including jewelry
and other assets.

Maintain savings −The money of the depositors is maintained, and the accounts are
checked and on a regular basis.

Maintain custodial accounts −These accounts are maintained under the supervision
of one person but are actually for the benefit of another person.
Lend money − Lending money to companies, depositors in case of some emergency.

Commercial bank follows 8 principles to remain in competition in these modern

days:

1) Liquidity: Liquidity principle is very important for commercial banks. Liquidity refers
to the ability of an asset to convert into the cash without loss within a short term and
paying the deposited money demand of customers is called liquidity.

2) Solvency: Solvency means financial capability. In this competition, commercial

banks must have sufficient capital. If the funds are not sufficient, the banks cannot run
business. Depositors keep cash in the bank and commercial bank ensures the safety of
deposited funds.

3) Profitability: The main objective of commercial banks is to earn profit. If the liquidity
is strong, then only commercial banks provides short term loans to customers.

4) Loans and investment: The main source of profit of bank is granting loans to
individual or organization. Investment is a source of income for commercial banks.
Commercial bank invest in the business and in the investment sector.

5) Saving: Firstly, commercial banks collect funds from creating saving facilities and
commercial bank invests these savings to generate profit. So, more savings more
investment and more profit.

6) Services: Commercial bank ensures best services to the customers. The success
depends on the best services provided by commercial banks.

7) Secrecy: Customers want to keep secrets about their valuable assets and money. So,
banks must keep secrets about their customer accounts. It is necessary to keep secrets.

8) Efficiency: Commercial banks must operate their business efficiently so that they
can succeed and commercial bank must train employees to increase the efficiency in
management.

Profitability
WHAT IS PROFITABILITY?
- Ability of a business to earn profit. Profit is what is left of the revenue a
business generates after it pays all expenses directly related to the generation
of the revenue such as producing a product and other expenses related to the
business’ activities.
- Is ability of a company to use its resources to generate revenues in excess of
its expenses. Company’s capability of generating profits from its operations.
Principle of PROFITABILITY in bank
BANK MUST MAKE PROFIT TO:
1. Pay interest on the deposit received by them.
2. Incur expenses on the establishment, rent, stationary.
3. They have to make provision for depreciation of their fixed assets and also for
other possible bad or doubtful debts.
After meeting all of these items of expenditure which enter the running cost of the banks.
A reasonable profit must be made. Otherwise, it will not be possible to carry anything
to the reserve or pay dividend to the shareholders.
FACTORS AFFECTING THE PROFITABILITY OF COMMERCIAL BANK
➢ Level of Competition, as competition increases, it generally leads to higher
operating costs. This leads to lower profitability.
➢ Cost of Funds, which are the expenses incurred on obtaining funds from
various sources in the form of share capital, reserves a, deposits, and
borrowings. Thus, it generally refers to interest expenses. Lowering the cost
of funds means higher profitability.
➢ Level of Technology; using upgraded technology normally leads to a decline
in the operating costs of banks. This improves the profitability of banks.
➢ Risk Cost: this cost is associated with the probable annual loss on assets.
They include provisions for bad debts and doubtful debts. Lower risk costs
increase the profitability of banks.
➢ Operating Costs are the expenses incurred in the functioning of the bank.
Excluding the cost of funds, all other expenses are operating costs. Lower
operating costs give rise to greater profitability for banks.
➢ Spread is another factor, which is defined as the difference between the
interest received and the interest paid. A higher spread indicates more
efficient financial intermediation and higher net income. Thus, a higher
spread leads to higher profitability.
➢ Non-Interest Income is the income derived from non-financial assets
and services. It includes commission and brokerage on remittance
facilities, the rent of locker facilities, fees for underwriting, and financial
guarantees. This income adds to the profitability of banks.

Market Structure
Market Structure refers to the way that various industries are classified and
differentiated in accordance with their degree and nature of competition for products
and services.
Types of Market Structure:

1. Perfect Competition

Perfect competition occurs when there is a large number of small companies

competing against each other. They sell similar products (homogeneous), lack price
influence over the commodities, and are free to enter or exit the market.

2. Monopolistic Competition

Monopolistic competition refers to an imperfectly competitive market with the

traits of both the monopoly and competitive market. Sellers compete among themselves
and can differentiate their goods in terms of quality and branding to look different. In
this type of competition, sellers consider the price charged by their competitors and
ignore the impact of their own prices on their competition.

3. Oligopoly

An oligopoly market consists of a small number of large companies that sell

differentiated or identical products. Since there are few players in the market, their
competitive strategies are dependent on each other.

4. Monopoly

In a monopoly market, a single company represents the whole industry. It has

no competitor, and it is the sole seller of products in the entire market. This type of
market is characterized by factors such as the sole claim to ownership of resources,
patent and copyright, licenses issued by the government, or high initial setup costs.

Regulations

Bank regulation
Banking regulation imposes various requirements, restrictions, and guidelines on
banks. The legal requirements differ from country to country. Still, they pursue similar
objectives,
such as reducing systemic risk by, for example, creating unfavorable trading conditions
for banks or preventing bank fraud.

Main purpose:

- To protect consumers, ensure the stability of the financial system, and prevent crime.
- To promote safe and sound banking practices by ensuring that banks have enough
capital to cover their risks, preventing them from engaging in unfair or deceptive
practices, and ensuring that consumers have access to information about their rights
and options.
- To supervise the activities of banks and enforce compliance with regulations.
Who regulates banks?
Being a heavily regulated industry worldwide, bank regulation varies from country to
country, but all countries have some form of regulation in place to ensure the stability
of their banking systems.
Regulations typically come from both government agencies and central banks.

Why is regulation important?

Bank regulation protects consumers by ensuring that banks maintain adequate capital
levels, disclose risks inherent in their business activities, and follow sound risk
management practices.
Regulation is also important because it promotes financial stability by limiting the ability
of banks to engage in activities that could lead to a systemic crisis.

Why are banks highly regulated?

• Banks deal with large amounts of money
• Banks play a crucial role in the economy
• Banks act as intermediaries between borrowers and lenders, helping to
allocate capital to its most productive uses.

Examples of Bank regulations

1. Reserve requirement
2. Capital requirement
3. Liquidity requirement

Reserve Requirements

-Reserve requirement dictate how much money banks must keep on hand
-Reserve requirements are the amount of funds that a bank holds in reserve to ensure
that it is able to meet liabilities in case of sudden withdrawals.
-Reserve requirements are a tool used by the central bank to increase or decrease the
money supply in the economy and influence interest rates.

Capital Requirements

-Capital requirement dictates how much money banks can lend

-Capital requirements are regulatory standards for banks that determine how much
liquid capital (easily sold assets) they must keep on hand, concerning their overall
holdings.
-Capital requirements are set to ensure that banks and depository institutions' holdings
are not dominated by investments that increase the risk of default.

Liquidity Requirements

-Liquidity requirements dictate how easily banks can convert their assets into cash