Commercial banks

A commercial bank is a financial institution that grants loans, accepts deposits, and offers basic
financial products to individuals and businesses. Commercial Banks, are so called because they
help in the development of trade and commerce. The commercial banks may be owned by
government or owned by private sector.

In Inda Commercial Banks include both scheduled and non-scheduled banks which are
regulated under Banking Regulation Act, 1949.

(a) Scheduled banks are banks that are listed in the 2nd schedule of the Reserve Bank of India
Act, 1934. Those not listed in the second schedule of the Reserve Bank of India Act, 1934 are
called non scheduled banks. Scheduled Commercial Banks are grouped under following
categories:

1. Scheduled public Sector Banks

State Bank of India and its Associates and Nationalised banks together are called public sector
banks. There are 12 public sector banks as per RBI report 2023April

3. Foreign Banks. As per RBI report 2023 April there were 45 foreign banks in India

4. Regional Rural Banks. As per RBI report 2023, April there were RRBs in India. Kerala
Gramin Bank is the RRB in Kerala

5.Scheduled Private Commercial Banks. As per RBI report 2023 April there were 21 banks in
India in private sector

6. Scheduled small finance banks. As per RBI report 2023 April there were 11Scheduled small
finance banks in India . ESAF Small Finance Bank Limited is an example of Scheduled small
finance banks in Kerala.
7. Scheduled Payment Banks There were 4 scheduled payment banks in India: India Post
Payments Bank Limited, Fino Payments Bank Limited, Paytm Payments Bank Limited
Airtel Payments Bank Limited

(b) Non-Scheduled Commercial Banks They include cooperative banks

Functions of commercial banks.

PRIMARY FUNCTIONS: Primary functions are also called as banking functions. The primary
functions of a bank are three types. They are:

1. Accepting Deposits: Banks accept deposit from the public. These deposits carry interest.
It also provides safety for their money. Bank accepts various types of deposits. There are
four types of Deposits: a) Fixed or Time Deposit Account b) Savings Bank Deposits
Account c) Current Deposits Account d) Recurring deposits Accounts

Current Account Deposits:

Current Accounts are usually opened by businessmen who have a number of regular
transactions with the bank, both deposits and withdrawls. There is no restriction on
number and amount of deposits. There is also no restriction on withdrawls. No interest is
paid on current deposits. Banks may even charge interest for providing this facility.
These accounts are also known as demand deposits as amount can be withdrawn on
demand.

Saving Account Deposits:

Saving Accounts are opened by salaried and other less income people. There is no
restriction on number and amount of deposits. withdrawls are subject to certain
restrictions. It earns Interest but less than fixed deposits. It encourages saving habit
among salary earners and others. Saving deposits are an important source of funds for
banks.

Fixed Account Deposits:

Deposits in fixed account are time deposits. Money under this account is deposited for a
certain fixed period of time varying from 15 days to several years. A high rate of interest
 is paid. If money is withdrawn before expiry date, the depositor receives lower rate of
interest. Deposits can be renewed for further period. Many banks sanction loans against
security of fixed deposits.

Recurring Account Deposits:

In Recurring deposit, a specified amount is regularly deposited by account holder, at an
internal of usually a month. This is to form the habit of small savings among the people.
At the end of maturity period, the account holder gets a substantial amount. Interest on
this type of deposit is almost equal to fixed deposits.
Thus by creating variety of deposits, banks motivate people in a variety of ways and
encourage savings in the economy.

2. Making loans and advances: Banks grant loans and advances to the needed persons. Interest is
charged on these loans. It promotes the economic development of the country by giving
assistance to industry and trade. The forms of loans and advances of commercial banks are:

a) Loans. Bank loan is an amount of money offered by a bank to a borrower at a defined

interest rate for a fixed period. The loan is granted against collateral that, if the
customer defaults, the bank can sell them to recover the money. The collateral may be
equipment, machinery, real estate property, inventory, documents of ownership, and other
items of transferable value

b) Cash Credits. Cash credit is an arrangement between the bank and a client, and it
allows the client to withdraw money beyond their account limit. The cash credit is
advanced for a period of one year, but it may extend to even three years in special
circumstances.

c) Overdrafts. A bank overdraft is a form of financing that allows the current account
holders to overdraw their account up to a specified limit. It does not require any written
formalities and clients use the overdraft to meet urgent needs. Interest is charged on the
 amount that the current account has been overdrawn with and not the full amount of
overdraft allowed by the bank.

d) Purchasing and Discounting of Bills. A bank discounts a bill of exchange by providing

money immediately to the holder of the bill. The bank deposits the money in the holder’s
current account, after deducting an interest rate for the loan period. Once the bill of
exchange matures, the bank gets its payment from the banker of the bill holder.

3. Credit Creation

The word ‘credit creation’ implies that banks are unique institutions and that they can create
bank deposits or create bank money while giving loans and purchasing bills and bonds . While
granting loans to customers, banks do not provide the loan in cash to the borrower instead, the
bank opens a deposit account in his or her name and deposits the loan amount in this account
from which the borrower can draw funds. Thus every loan creates a deposit. This is known as
credit creation

2. Secondary/Non-banking Functions:
Banks gives various forms of services to public. Such services are termed as non- banking or
secondary functions: these include General Utility Services and Agency services

A.General Utility Services:

Modern Commercial banks also performs certain general utility services for the community, such
as

i. Letter Of Credit: One of the problems international trade is lack of trust. With the help
financial devices like Letter of Credit commercial banks act as a bond of trust between
international buyers and sellers. By issuing ‘Letter of Credit’ banks provide guarantee to
foreign traders for the soundness of their customers.

ii. Transfer Of Funds:

Banks arrange transfer of funds cheaply and safely from one place to another. Transfer can be in
the form of Demand draft, Mail transfer Travellers cheques etc.

iii. Guarantor: RBI has authorized commercial banks to issue guarantees and bid bonds in
favor of importers. No prior permission of the RBI is required for the issue of such
guarantees. Banks offer a guarantee of payment on behalf of importer to facilitate imports with
deferred payments.

iv. Underwriting:
This facility is provided to Joint Stock Companies and to government to enable them to raise
funds. In the securities market, underwriting involves determining the risk and price of a
particular security. It is a process seen most commonly during initial public offerings, wherein
the bank underwrites the securities of the issuing entity. The underwriters earns a a premium in
return for the service. Banks guarantee the purchase of certain proportion of shares if not sold in
the market. Investors benefit a lot from the underwriting process
Vi. Agency services
Banks perform certain functions on behalf of their customers. While performing these services,
banks act as agents to their customers, hence these are called as agency services. Important
agency functions are:

vii. Collection:
Commercial banks collect cheques, drafts, bills, promissory notes, dividends, subscriptions, rents
and any other receipts which are to be received by the customer. For these services banks charge
a nominal amount.

viii. Payment:
Banks also make payments on behalf of their customers like paying insurance premium, rent,
taxes, electricity and telephone bills etc. For such services commission is charged.

ix. Income - Tax Consultant:

Commercial banks act as income-tax consultants. They prepare and finalise the income tax
returns of their clients.

x. Sale And Purchase Of Financial Assets:

As per the customers instruction banks undertake sale and purchase of securities, shares and any
other financial assets. Nominal charges are charged by a bank.

xi. Trustee, Executor And Attorney:

As a trustee, banks become the custodian and manager of customer funds. Bank also acts as
executor of deceased customer’s will. As an Attorney the banks sign the documents on behalf of
customer.
xii. Locker Facility:
Safe Lockers are provided to the customers. So that they can deposit their valuables like
Jewellary, Securities, Shares and otherdocuments.

xiii. Referee:
Banks may act as referee with respect to financial standing, business reputation and
respectability of customers.

xiv. Credit Cards:

Credit card facility have been introduced by commercial banks. It enables the holder to minimize
the use of hard cash. Credit card is a convenient medium of exchange which enables its holder to
buy goods and services from member – establishment without using money.
xv. E-Banking:
Through Electronic Banking, a customer can operate his bank account through internet. He can
make payments of various bills. He can even transfer money from one place to another.

xvi. Subsidiary Activities:

Many commercial banks also undertakes subsidiary activities such as:
xvii. Housing Finance:
Housing finance is provided against the security of immoveable property of land and buildings.
Many banks such as SBI, Bank of India etc. have set up housing finance subsidiaries.

xiii. Mutual Funds:

A Mutual fund is a financial intermediary that pools the savings of investors for collective
investment in diversified portfolio securities. Many banks like SBI, Indian Bank etc. have set up
mutual fund subsidiaries.

xiv. Merchant Banking:

A variety of services are offered by merchant banking like: Management, Marketing and
Underwriting of new issues, project promotion, corporate advisory services, investment advisory
services etc.

xv. Venture Capital Fund:

Venture capital fund provides start-up share capital to new ventures of little known, unregistered,
risky, young and small private business, especially in technology oriented and knowledge
intensive business. Many commercial banks like SBI, Canara Bank etc. have set up venture
Capital Fund Subsidiaries.

xvi. Loans to Agriculture:

Banks grant short-term credit to agriculture at a lower rate of interest. Loans are granted for
irrigation, purchase of equipments, inputs, cattle etc.