Commercial Banking

Presented

by:Pallavi Sharma Shivani Yadav MBA {FM} 2ND YEAR

WHAT IS BANKING?

Basic

Definition: A system of trading money which provides a safe place to save excess cash, known as deposits. Supplies liquidity to the economy by loaning this money out to help businesses grow and to allow consumers to purchase consumer products, homes, cars etc.

TYPES OF BANKS
Banks

can be classified into Commercial banks and Central bank. Commercial banks are those which provide banking services for profit. The Central bank has the function of controlling commercial banks and various other economic activities.

DEFINITON OF CENTRAL BANKING

A

central bank is an apex institution in the banking structure of a country. It supervises , controls and regulates the activities of commercial banks and acts as a banker to them. It also acts as a banker, agent and adviser to the government in all financial and monetary matters. A central bank is also the custodian of the foreign balances of the country and is responsible to maintain the rate of exchange fixed by the government and manages exchange control . The most important function of a central bank is to regulate the volume of currency and credit in a country.

Definition of Commercial Banking

Commercial

banks are in the business of providing banking services to individuals, small businesses and large organizations. While the banking sector has been consolidating, it is worth noting that far more people are employed in the commercial banking sector than any other part of the financial services industry.

TYPES OF COMMERCIAL BANKS

DEPOSIT BANKS
These

banks accept deposits from the public and lend them to needy parties. Since their deposits are for short period only, these banks extend loans only for a short period. Ordinarily these banks lend money for a period between 3 to 6 months. They do not like to lend money for long periods or to invest their funds in any way in long term securities.

INDUSTRIAL BANKS
Industrial

banks help industrialists. They provide long term loans to industries. Besides, they buy shares and debentures of companies, and enable them to have fixed capital. Sometimes, they even underwrite the debentures and shares of big industrial concerns. The important functions of industrial banks are: 1. They accept long term deposits. 2. They meet the credit requirements of industries by extending long term loans. 3. These banks advise the industrial firms regarding the sale and purchase of shares and debentures.

SAVINGS BANK
These

banks were specially established to encourage thrift among small savers and therefore, they were willing to accept small sums as deposits. They encourage savings of the poor and middle class people. In India we do not have such special institutions, but post offices perform such functions. After nationalisation most of the nationalised banks accept the saving deposits

AGRICULTURAL BANKS
These

banks are organised on cooperative lines and therefore do not work on the principle of maximum profit for the shareholders. These banks meet the credit requirements of the farmers through term loans, viz., short, medium and long term loans.

EXCHANGE BANKS
These

banks finance mostly for the foreign trade of a country. Their main function is to discount, accept and collect foreign bills of exchange . They buy and sell foreign currency and thus help businessmen in their transactions. They also carry on the ordinary banking business.

MISCELLANEOUS BANKS
There

are certain kinds of banks which have arisen in due course to meet the specialised needs of the people.

FUNCTIONS OF COMMERCIAL BANKS

FUNCTIONS OF COMMERCIAL BANKS

Commercial bank being the financial institution performs diverse types of functions. It satisfies the financial needs of the sectors such as agriculture, industry, trade, communication, etc. The functions performed by banks are changing according to change in time and recently they are becoming customer centric and widening their functions. Generally the functions of commercial banks are divided into two categories viz. primary functions and the secondary functions. The following chart simplifies the functions of banks

CONTD

PRIMARY FUNCTIONS

1. Acceptance of Deposits: Accepting deposits is the primary function of a commercial bank mobilise savings of the household sector. Banks generally accept three types of deposits viz., (a) Current Deposits (b) Savings Deposits, and (c) Fixed Deposits. 2. Advancing Loans: The second primary function of a commercial bank is to make loans and advances to all types of persons, particularly to businessmen and entrepreneurs. Loans are made against personal security, gold and silver, stocks of goods and other assets

CONTD.
CREATION OF CREDIT: Banks supply money to traders and manufacturers. They also create or manufacture money. Bank deposits are regarded as money. banks are not merely purveyors of money, but also in an important sense, manufacturers of money. CLEARING OF CHEQUES: The commercial banks render an important service by providing to their customers a cheap medium of exchange like cheques. It is found much more convenient to settle debts through cheques rather than through the use of cash . The cheque is the most developed type of credit instrument in the money market.

CONTD

5. Financing Internal and Foreign Trade: The bank finances internal and foreign trade through discounting of exchange bills. This discounting business greatly facilitates the movement of internal and external trade. 6. Remittance of Funds: Commercial banks, on account of their network of branches throughout the country, also provide facilities to remit funds from one place to another for their customers by issuing bank drafts, mail transfers or telegraphic transfers on nominal commission charges.

SECONDARY FUNCTIONS
B. Secondary Functions :

Functions of the commercial banks include: 1. Agency Services 2. General Utility Services

 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
To provide safety locker facility to customers. To provide money transfer facility. To issue traveller's cheque. 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.

CONCLUSION
BANKS:

help development of trade and industry in the country. encourage habits of thrift and saving. help capital formation in the country. lend money to traders and manufacturers.