COMMERCIAL BANKS IN

INDIA

Definition of banking

• “Bank is an institution which collects money from those who have in spare or who are saving it out of their income ; and lend this money out to those who require it.”

• All those institutions which are in the business of banking are called financial institutions.

Definition contd...

• Commercial Banks are like other financial institutions ( e.g.: money lenders, indigenous bankers, cooperative societies, agricultural and industrial credit institutions) which are in the business of lending and borrowing of money or credit.

Yes

• Commercial Banks are the most important credit institutions in the country in the business of lending and borrowing of money and credit creation.

Functions of Commercial Banks

• Accepting deposits• Advancing Loans• Discounting Bills of exchange• Agency services • General services

Functions of Commercial Banks

• Accepting Deposits Demand or Current Account Deposits:

- A depositor can withdraw it in part or in full at any time he likes without notice It carries no interest

-Only small savings of businessmen Cheque facilities

Fixed Deposits or Time Deposits

– Fixed deposits for 15days to few years – Withdrawn at expiry of term– High rate of interest – A source of investment

Saving Bank Deposits

• small saving deposits • salaried people• less rate of interest• money can be withdrawn • through cheques

Advancing Loans

• This is the most important means of earnings for the banks

• Giving loans to businessmen• But it keeps a fine balance between

deposits and loans• Banks profitability depends on this as well.

Two ways of advancing loans

  By allowing an over draft facility cheques are honoured even if deposits is less

facility for businessmen only interest on overdraft amount

Loans by creating a deposit

• Banks give loans to people by charging interest

• Bank asks for security• Simply opens an account in name of

needy person and issues a cheque book to transact

• Loans granted mostly for business

Discounting Bills of Exchange

• If a seller sells some goods to a buyer who does not pay in cash. But the seller draws a bill of exchange which is signed by buyer

• There is maturity or payment period, say one month

• Now the seller can give this exchange bill to a bank which will give him cash against it

• Bank charges interest on it till one month

Agency Services

• Collection of bills, cheques• Collection of dividends, interest, premium• Purchase and sale of shares and

debentures• Payment of insurance premiums• Acts as trustee when nominated

General services

• Traveller’s cheques, bank draft• Safe vaults for valuables• Supplying trade information • Economic surveys• Projects report preparation

Classification of banks

• Central bank• Commercial Banks : short term credit • Industrial Banks: long term capital needs• Exchange Banks: Finance export import• Land Mortgage or land Development Bank: long

term credit for agriculture• Cooperative banks: small saving as joint effort of

members, low interest rate, registered under Cooperative Society’s Acts.

Credit Creation

• Banks create credit by creating cheque money or deposit money which on account of its free acceptability, circulates like legal tender money.

• This increases or decreases money in circulation without increase or decrease in currency or legal tender money.

Credit Creation By Banks

• Definition: It is the process of creation of credit by commercial banks. More use of DD and cheques is CC and not cash.

• Cheques and deposit money are as good as legal tender money on account of their acceptability by the general public .

Assumptions of credit creation:

• Adjusts assets balance between deposit liability and cash reserves

• Cash reserve ratio remains same• There should be sound banking system• No credit control policy of central bank• Business is normal, no depression

Limits of credit creation

• 1) Amount of cash of banks. Greater is amount, larger is its capacity for c.c.

• 2) Cash reserve ratio: lower is crr, higher is credit creation capacity

• 3) External drain: larger is amount of money withdrawn from bank, lower is its cc.

• 4) extent of borrowing of funds by business. More c.c. when business is prospering.

Limits of credit creation Continue.......

• supply or collateral security: larger and better is availability of security against loan, greater is extent of C.C.

• Banking habit of people: if people use more of cash and less of cheque then CC is not possible.

• Monetary policy of central bank: central bank can influence CC by credit control tools

Nationalization of banks in India

 What is Nationalization of banks• The process of transferring ownership and operational

rights of a bank from private or trusts to the government of the country.

• In India also, 14 leading banks were nationalized on July 18, 1969.

• Each one’s deposits were more than Rs 50 crores.• Their share in total deposits and advances were

almost two third of all scheduled banks in nation

Nationalization of banks in India continues

• Nationalized banks were forced to follow directions and guidelines issued by government.

• At that time there were more than 645 banks having more than 4800 branches.

• They were serving only urban areas, big industrial houses at the cost of rural areas and small industries.

Nationalization of banks in India continues

• Indira Gandhi was the then P.M.• 6 more banks were nationalized in 1980.• National credit council was implementing

body.• In 1993 two banks were nationalized and

no. of nationalized banks is 19.

Objectives Of Nationalization• to reduce concentration of economic powers with only

a few industrial magnets and to prevent monopolies.• Mobilize resources even from backward and rural

areas• To prevent lopsided regional development• To prevent corruption and misuse of firms: the trustees

were only benefiting from huge resources and it was at the cost of general development in the country.

Objectives Of Nationalization Continues...

• To provide aid to the poor, small artisans and small scale industries. Small scale industries contributed 40% of industrial output but received only 4% of bank funds.

• To fulfil credit needs of farmers: hardly 2.2% of funds were available for agriculture.

Objectives Of Nationalization continues....

• To finance government’s development projects; specially five year plans

• To prevent giving loans to those firms were not existing in the priority list

• To prevent loan/advances to black marketers and hoarders.

Promotion of new entrepreneurship

• Banks have been actively financing IRDP, NREP, TRYSEM, JRY, NRY.

• The banks have been lending to the high priority projects in the economy.

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