COMMERCIAL BANKS

Commercial bank is a financial institution that accepts deposits for the purpose of lending. 

Commercial Bank act as intermediaries because they accept deposits from savers and lend these funds to borrowers. In other words, commercial banks provide services such as accepting deposits, giving business loans and also allow for variety of deposit accounts. They collect money from those who have it to spare and lend to those who require it. Commercial bank is a banker to the general public. 

Commercial banks are registered under Indian Companies Act, 1956 and are also governed by the Indian Banking Regulation Act, 1949. 

Structure of Commercial Banks: Commercial banks are basically of two types: 1.Scheduled banks 2.Non-scheduled bank 

Scheduled banks are those which have been in II Schedule of RBI Act, 1934 and following criteria should be satisfied. 

- Minimum paid up capital Rs.5 lakh 

- It must be a corporation as cooperative society 

- Any activity of bank will not adversely affect the interest of depositors. 

Scheduled banks consist of public sector banks, private sector banks, foreign banks and regional rural banks. 

 Public Sector Banks: Public sector banks are those in which 50% of their capital is provided by Central Government, 15% by concerned State Government and 35% by sponsored commercial banks. In India, there are 27 public sector banks. 

They include the State Bank of India and its 6 associated banks such as State Bank of Hyderabad, State Bank of Mysore, etc. and 19 nationalised banks and IDBI banks ltd.

Private Sector Banks: Private sector banks are those in which majority of share capital kept by business house and individual. After the nationalization, entry of private sector banks is restricted. But some of private banks continued to operate such as Jammu & Kashmir bank ltd. To increase the competition spirit and improve the working of public sector banks, RBI permitted the entry of private sector banks in July, 1993.

Foreign Banks: Foreign banks are those which incorporated outside India and open their branches in India. Foreign banks performed all the function like other commercial banks in India. Foreign banks are superior in technology and management than Indian banks. They offer different types of products and services such as offshore banking, online banking, personal banking, etc. They provide loans for automobiles, small and large businesses. Foreign banks also provide special types of credit card which are nationally and internationally accepted. These banks earn lots of profit and create new ways of investments in the country. 

 Regional Rural Banks: The regional rural banks are banks set up to increase the flow of credit to smaller borrowers in the rural areas. These banks were established on realizing that the benefits of the co-operative banking system were not reaching all the farmers in rural areas.  

Functions of a Commercial Bank can be classified into three.

 I.Principal/ Primary/ Fundamental functions 

II.Subsidiary/ Secondary/ Supplementary functions 

III.Innovative functions. 

Principal functions: Commercial banks perform many functions. They satisfy the financial needs of the sectors such as agriculture, industry, trade, communication, so they play very significant role in a process of economic social needs. The functions performed by banks, since recently, are becoming customer-centred and are widening their functions. Generally, the functions of commercial banks are divided into two categories; primary functions and the secondary functions. Two ‘acid test’ functions of commercial banks are Accepting deposits and Lending loans. These functions along with credit creation, promotion of cheque system and investment in Government securities form basic functions of commercial banks. The secondary functions of commercial banks include agency services, general utility services and innovative services. 

Receiving deposits: Most important function of a commercial bank is to accept deposit from those who can save but cannot profitably utilise this savings themselves. By making deposits in bank, savers can earn something in the form of interest and avoid the danger of theft. To attract savings from all sorts of customers, banks maintain different types of accounts such as current account, Savings bank account, Fixed Deposit account, Recurring deposit account and Derivative Deposit account. 

Lending of funds: The second important function of commercial banks is to advance loans to its customers. Banks charge interest from the borrowers and this is the main source of their income. Modern banks give mostly secured loans for productive purposes. In other words, at the time of advancing loans, they demand proper security or collateral. Generally, the value of security or collateral is equal to the amount of loan. This is done mainly with a view to recover the loan money by selling the security in the event of non-refund of the loan. Commercial banks lend money to the needy people in the form of Cash credits, Term loans, Overdrafts (OD), Discounting of bills, Money at call or short notice etc. 

Cash Credit: In this type of credit scheme, banks advance loans to its customers on the basis of bonds, inventories and other approved securities. Under this scheme, banks enter into an agreement with its customers to which money can be withdrawn many times during a year. Under this set up banks open accounts of their customers and deposit the loan money. With this type of loan, credit is created. 

Term loans: A term loan is a monetary loan that is repaid in regular payments over a set period of time. In other words, a loan from a bank for a specific amount that has a specified repayment schedule and a floating interest rate is called Term loan. Term loans usually last between one and ten years, but may last as long as 30 years in some cases. It may be classified as short term, medium term and long term loans. 

Over-Drafts: It is the extension of credit from a bank when the account balance reaches zero level. Banks advance loans to its customer’s up to a certain amount through over-drafts, if there are no deposits in the current account. For this, banks demand a security from the customers and charge very high rate of interest. Overdraft facility will be allowed only for current account holders. 

Discounting of Bills of Exchange: This is the most prevalent and important method of advancing loans to the traders for short-term purposes. Under this system, banks advance loans to the traders and business firms by discounting their bills. While discounting a bill, the Bank buys the bill (i.e. Bill of Exchange or Promissory Note) before it is due and credits the value of the bill after a discount charge to the customer's account. The transaction is practically an advance against the security of the bill and the discount represents the interest on the advance from the date of purchase of the bill until it is due for payment. In this way, businessmen get loans on the basis of their bills of exchange before the time of their maturity. 

Money at Call and Short notice: Money at call and short notice is a very short-term loan that does not have a set repayment schedule, but is payable immediately and in full upon demand. Money at-call loans give banks a way to earn interest while retaining liquidity. These are generally lent to other institutions such as discount houses, money brokers, the stock exchange, bullion brokers, corporate customers, and increasingly to other banks. ‘At call’ means the money is repayable on demand whereas ‘At short notice’ implies the money is to be repayable on a short notice up to 14 days. 

Investment of funds in securities: Banks invest a considerable amount of their funds in government and industrial securities. In India, commercial banks are required by statute to invest a good portion of their funds in government and other approved securities. The banks invest their funds in three types of securities—Government securities, other approved securities and other securities. Government securities include both, central and state governments, such as treasury bills, national savings certificate etc. Other securities include securities of state associated bodies like electricity boards, housing boards, debentures of Land Development Banks, units of UTI, shares of Regional Rural banks etc. 

Credit Creation: When a bank advances a loan, it does not lend cash but opens an account in the borrower’s name and credits the amount of loan to this account. Thus a loan creates an equal amount of deposit. Creation of such deposit is called credit creation. Banks have the ability to create credit many times more than their actual deposit.  

Promoting cheque system: Banks also render a very useful medium of exchange in the form of cheques. Through a cheque, the depositor directs the banker to make payment to the payee. In the modern business transactions by cheques have become much more convenient method of settling debts than the use of cash. Through promoting cheque system, the banks ensure the exchange of accounted cash. At present, CTS (Cheque Truncation System) cheques are used by Indian Banks to ensure speedy settlement of transactions in between banks. In contrast to the declining importance of cheques, the use of electronic payment instruments at the retail level has been growing rapidly. 

Subsidiary functions: 

Agency services: Banks act as an agent on behalf of the individual or organizations. Banks, as an agent can work for people, businesses, and other banks, providing a variety of services depending on the nature of the agreement they make with their clients. 

Following are the important agency services provided by commercial banks in India. 

- Commercial Banks collect cheques, drafts, Bill of Exchange, interest and dividend on securities, rents etc. on behalf of customers and credit the proceeds to the customer’s account. 

- Pay LIC premium, rent, newspaper bills, telephone bills etc

- Buying and selling of securities 

- Advise on right type of investment 

- Act as trustees (undertake management of money and property), executors (carry out the wishes of deceased customers according to will) & attorneys (collect interest & dividend and issue valid receipt) of their customers. 

- Serve as correspondents and representatives of their customers. In this capacity, banks prepare Income Tax returns of their customers, correspond with Income Tax authorities and pay Income Tax of their customers. 

General Utility Services: In addition to agency services, modern banks perform many general utility services for the community. 

- Locker facility: Bank provides locker facility to their customers. The customers can keep their valuables such as gold, silver, important documents, securities etc. in these lockers for safe custody. 

- Issue travelers’ cheques: Banks issue traveler’s cheques to help their customers to travel without the fear of theft or loss of money. It enables tourists to get fund in all places they visit without carrying actual cash with them. 

- Issue Letter of Credits: Banks issue letter of credit for importers certifying their credit worthiness. It is a letter issued by importer’s banker in favour of exporter informing him that issuing banker undertakes to accept the bills drawn in respect of exports made to the importer specified therein. 

-Act as referee: Banks act as referees and supply information about the financial standing of their customers on enquiries made by other businessmen. 

- Collect information: Banks collect information about other businessmen through the fellow bankers and supply information to their customers. 

- Collection of statistics: Banks collect statistics for giving important information about industry, trade and commerce, money and banking. They also publish journals and bulletins containing research articles on economic and financial matters. 

- Underwriting securities: Banks underwrite securities issued by government, public or private bodies. 

- Merchant banking: Some bank provides merchant banking services such as capital to companies, advice on corporate matters, underwriting etc. 

Innovative Functions: The adoption of Information and Communication technology enables banks to provide many innovative services to the customers such as; 

ATM services: Automated Teller Machine (ATM) is an electronic telecommunications device that enables the clients of banks to perform financial transactions by using a plastic card. Automated Teller Machines are established by banks to enable its customers to have anytime money. It is used to withdraw money, check balance, transfer funds, get mini statement, make payments etc. It is available at 24 hours a day and 7 days a week. 

Debit card and credit card facility: Debit card is an electronic card issued by a bank which allows bank clients access to their account to withdraw cash or pay for goods and services. It can be used in ATMs, Point of Sale terminals, e-commerce sites etc. Debit card removes the need for cheques as it immediately transfers money from the client's account to the business account. Credit card is a card issued by a financial institution giving the holder an option to borrow funds, usually at point of sale. Credit cards charge interest and are primarily used for short- term financing. 

Tele-banking: Telephone banking is a service provided by a bank or other financial institution that enables customers to perform financial transactions over the telephone, without the need to visit a bank branch or automated teller machine. 4.Internet Banking: Online banking (or Internet banking or E-banking) is a facility that allows customers of a financial institution to conduct financial transactions on a secured website operated by the 29institution. To access a financial institution's online banking facility, a customer must register with the institution for the service, and set up some password for customer verification. Online banking can be used to check balances, transfer money, shop online, pay bills etc. 

Bancassurance: It means the delivery of insurance products through banking channels. It can be done by making an arrangement in which a bank and an insurance company form a partnership so that the insurance company can sell its products to the bank's client base. Banks can earn additional revenue by selling the insurance products, while insurance companies are able to expand their customer base without having to expand their sales forces. 

Mobile Banking: Mobile banking is a system that allows customers of a financial institution to conduct a number of financial transactions through a mobile device such as a mobile phone or personal digital assistant. It allows the customers to bank anytime anywhere through their mobile phone. Customers can access their banking information and make transactions on Savings Accounts, Demat Accounts, Loan Accounts and Credit Cards at absolutely no cost. 

Electronic Clearing Services: It is a mode of electronic funds transfer from one bank account to another bank account using the services of a Clearing House. This is normally for bulk transfers from one account to many accounts or vice versa. This can be used both for making payments like distribution of dividend, interest, salary, pension, etc. by institutions or for collection of amounts for purposes such as payments to utility companies like telephone, electricity, or charges such as house tax, water tax etc. 

Electronic Fund Transfer/National Electronic Fund Transfer (NEFT): National Electronic Funds Transfer (NEFT) is a nation-wide payment system facilitating one-to-one funds transfer. Under this Scheme, individuals, firms and corporate can electronically transfer funds from any bank branch to any individual, firm or corporate having an account with any other bank branch in the country participating in the Scheme. In NEFT, the funds are 30transferred based on a deferred net settlement in which there are 11 settlements in week days and 5 settlements in Saturdays. 

Real Time Gross Settlement System (RTGS): It can be defined as the continuous (real-time) settlement of funds transfers individually on an order by order basis. 'Real Time' means the processing of instructions at the time they are received rather than at some later time. It is the fastest possible money transfer system in the country.