A commercial bank is a financial institution that grants loans, accepts deposits and provide basic financial products like a savings account and certificate of deposits to individuals and businesses.
The commercial bank’s funds come from money deposited by the bank customers in saving account, checking accounts, money market accounts and certificates of deposits.
Types Of Commercial Bank :
There are two types of commercial bank:
- Schedule Banks
- Non Schedule Banks
Scheduled Bank :
Scheduled Bank refers to those banking institutions whose names are included in the second schedule of the Central Bank.
Conditions of Scheduled Banks:
- The paid-up capital and reserve of the bank should not be less than 5 lakes.
- The bank must satisfy the Central Bank that its affairs are not conducted in a manner detrimental to the interest of the depositors.
- The bank must be a corporation or cooperate in society and not a partnership or single own firm.
Types Of Scheduled Bank :
- Public sector banks
- Private Sector bank
1. Public Sector Bank: Public sector banks are those banks in which the government has majority shareholding more than 51 per cent.
Public sector banks are owned and controlled by the government either directly or indirectly through the central banks. These banks are also known as the National Bank.
Types Of Public sector Banks :
- State bank group
- Nationalised Bank
State Banks Group: The public sector commercial banking in India started with the setting up of state bank of India in the year 1955.
State bank group consists of the State Bank and it’s 6 associate Banks.
Nationalised Banks: An important step towards public sector banking was taken in July 1969, when 14 major banks were nationalised.
Again in 1980, 6 more private sector banks were nationalised, bringing up the total number of such banks to 20.
However in 1993 one of these banks viz, New Bank of India merged with Punjab National Bank and hence at present, there are 19 Nationalised Banks in India.
2. Private Sector Banks :
Private sector banks are those banks in which the government has majority shareholding less than 51 per cent.
Private sector banks are those banks which are owned by private individuals or business corporation.
Types Of Private Sector Banks :
- Nationalised Bank
- Foreign Banks
Nationalised Bank: These are the banks which are incorporated in the home country under the companies. These banks are owned and controlled by private entrepreneurs.
In the pre-reform periods, there were only 24 banks in the private sector. At present, there are 27 private sector banks operating in the banking sector.
Foreign Banks: These banks are foreign in origin. These banks are incorporated outside of the country under the law of the home country but have a place of business in other countries.
Foreign Banks have their presence from the British period in our country.
Initially, they were allowed to operate only through branches but now they are allowed to set up subsidiaries in India.
Some Example of Foreign Banks: Standard Chartered Banks, Hongkong Shanghai Banking Corporation, American Express Banking Corporation, Bank of Tokyo, Citi Bank.
Functions of Foreign Bank:
A) Bringing together foreign institutional investors and Indian companies.
B) Helping foreign companies and Indian companies to enter into joint ventures.
C) Raising finance for power generation, telecommunications and mining projects in India.
D) Managing data and information systems by using the latest technology.
E) Managing the foreign issues of debt or equity of the Indian companies.
Non-Scheduled Bank :
Non scheduled Bank are those Banks whose names do not appear in the list of scheduled Banks maintained by the central bank.
However, these banks come within the sweep of the banking regulation act 1949 and are therefore obliged to follow the central bank’s guidelines and provisions of the act.
For instance, these banks are required to keep a minimum capital of Rs 5 lake, these banks have to comply with the cash reserve requirements condition to the central bank etc.
Non scheduled are not eligible for having financial assistance from the central bank under emergency situations.
These banks are also deprived of privileges available to scheduled Bank.
Functions Of Commercial Bank :
The basic rule of a commercial bank is to provide financial services to the general public, business and companies.
Bank also ensure economic stability and suitable growth of a countries economy.
The main functions of a commercial bank are:
A ) Acceptance Of Deposits: The most important activity of a commercial bank is to mobilize deposit from the public.
People who have surplus income and savings, find it convenient to deposit the amount with commercial banks in different types of deposits account which is as follows:
I) Savings Account Deposit: This type of account is generally maintained by the households or business individual.
The depositor can deposit or withdraw money under this account only for a limited number of times. This account also attracts a nominal rate of interest to the account holders.
This account as the name suggests is meant for promotion of savings. A person having a regular and fixed income can deposit their savings in this account.
II) Current Account Deposit: This type of account is generally maintained by the business entities and money under this deposit are payable on demand of the depositor.
The depositor is free to deposit or withdraw money from their account any number of times without any restrictions.
III) Fixed Deposits Account: A fixed account is deposited for a fixed period of time.
It is also known as a term deposit. The fixed period of time might be from 30 days to 5 years and more.
The rate of interest on these accounts is higher than savings and current account deposit because the amount accepted is invested elsewhere for the long term by the bank.
The depositor can get a loan against this account.
B. Transfer of money: The commercial bank provides facilities of funds transfer to its customers through the instructions of cheques, demand draft or electronic fund transfer from one place to another place or one person to another person.
C. Sale And purchase of foreign exchange: This is another important function of a commercial bank which has increased tremendously with increasing the volume of the international trade particularly in the era of globalization.
D. Collection of Cheques: The commercial bank collects the money of the cheques as per the customer want.
E. Periodic Collection: The commercial bank also collects the periodic payment like pension, salary and other periodic payment on behalf of the customer.
F. Granting Loans And Advances: This is another important function of a commercial bank. This is the main source of income of any commercial bank.
Banks grant loans and advances out of surplus money after keeping a certain percentage of their total deposit are called reserves.
Some important forms of loans and advances are ordinary loans, overdraft facility, discounting of the bill of exchange.
Types Of Advances Offered By A Commercial Bank :
2. Cash credit
4. Purchasing and discounting of the bill.
1. Loan: Sanctioned of a specified total amount by the banker to the customer is called s loan.
In case of a loan, a specified amount of money is sanctioned by the banker to the customer for a specific purpose.
The customer can obtain a loan from the bank with or without any tangible security. The entire loan amount paid to the borrower either in cash or by a credit to his account.
The loan is given for a certain fixed period of time at an agreed rate of interest.
The borrower is required to pay interest on the entire amount of the loan from the date of sanction.
A loan may be rapid in whole or instalments. The rates of interest on the loan are usually lower as compared to cash credit and overdraft.
Different Types of Loans:
A) Term Loans: It refers to loans granted for a fixed period of time. It may be short term, medium-term or long term loans.
B) Bridge Loans or interim loans: It refers to the loans granted to meet urgent and essential needs of the business concerns til the sanctioning of term loan.
C) Composite Loans: It refers to the loans consisting of both short term and long term funds.
D) Personal Loans: It refers to the loans granted to the individual customer to meet their consumption expenditure. Example: Buying durable, education loans, housing loans, travelling loans etc.
E) Consortium Loans: It refers to the loans granted by more than one lending agencies.
II) Cash Credit: Cash credit is an important and frequently used mode of borrowing from the banks.
Cash credit is an arrangement by which a customer can borrow money from the bank through his current account up to a certain limit.
The banker sanctioned cash credit against some tangible securities which are charged with the bank.
The borrower is authorized to withdraw money from his credit limit according to his needs and he can also deposit any surplus amount which is thus an active and running account to which withdrawals and deposit may be effected frequently.
The interest in case of cash credit is charged on the actual amount utilised by the borrower and for the period of actual utilisation.
Features Of Cash Credit :
- The banker fixes the cash credit limit of the borrower.
- Cash credit is sanctioned against tangible securities or guarantees.
- Money can be withdrawn and deposited by the borrowers in his account as and when required and feasible for him.
- Interest is charged only on the actual amount withdrawn and for the period of actual utilisation.
- Cash credit advance is technically repayable on demand.
- This system is flexible and the borrower may withdraw such amount of money from his cash credit limit as and when required by him.
III) Overdraft: Overdraft means an arrangement with a bank by which a current account holder is allowed to withdraw more than the balance standing to his credit up to a certain limit.
An overdraft can either be clean overdraft, partly secured or fully secured.
The borrower is allowed to withdraw the amount as and when he needs and repay it by means of deposits in his account and when it is feasible for him.
In other words, interest on overdraft credit is higher than on loans but is lower as compared to cash credit.
Interest is charged on the exact amount overdrawn by the customer and for the period of its actual utilisation.
The main difference between cash credit and overdraft is that the cash credit account is a long term facility whereas overdraft is usually a temporary short term facility.
Generally, an overdraft facility is sanctioned by the bank on the basis of a written application signed by the customer for such facility.
Features Of Overdraft:
A) It is sanctioned through and to the current account holders.
B) It may be granted either against collateral security or on the personal guarantee of the borrower.
C) The borrower may withdraw money as much as needed from the account subject to the overdraft limit.
D) Interest is charged on the actual amount utilised and for the period of actual utilisation only.
E) A commitment charge may be payable by the customer on the utilised overdraft limit.
F) Overdraft is technically repayable on demand and there is no fixed date of payment.
IV) Purchasing And Discounting of bills: Purchasing and discounting of bills is the most important form in which a bank lends without any collateral securities.
A customer having bills can obtain immediate cash from the bank and do not have to wait until the bank collects the payments of the bills.
The bills which are used by the customer to borrow from banks may be demand bill or time bills.
Demand bills are payable on demand while time bills after the expiry of a definite period of time.
The term purchasing of the bill while the term discounting of bills is used when the bank deals with time bill.
The customer having the bills, whether demand bills or time bills, can get immediately the value of the bill less bank charge.
In case of demand bills, the bank presents the bills to the drawee and collect payment of the bill immediately. Hence the bank charges are less in case of purchasing of bills.
On the other hand in case of time bills, the bank has to wait until the maturity of the bill before he can collect the payment of the bills.
In such cases, the bank charges interest from the date of discounting till the maturity of the bills beside its usual commission and hence the bank charges are more in case of discounting bills.
Precautions in Purchasing and Discounting of Bills :
lending by way purchasing and discounting of bills is very safe as well as profitable for banks.
However, the banker should not negligent and should take the following precautions while lending in this form:
I) Type Of Bill: The banker should advanced money only against trade bills. Accommodation bills should be avoided because these bills are without any backing of goods.
II) Borrower: The banker should satisfy himself regarding the creditworthiness of the borrower.
He should verify the capacity, capital and character of the borrower.
III) Complete bill: The banker should see that the bill is complete in all aspects. The bill should comply with the norms prescribed by law and it should not be overdue or defective in any respect.
IV) Stamp Duty: The banker should see that the bill is prescribed by law and it should not be overdue or defective in any respect.
Principles Of Sound Lending :
A) Safety: Safety of the funds is the primary concern of a bank while lending money.
Safety means that the borrower shall relay the principal amount along with interest.
B) Liquidity: Liquidity of loans is another guideline of sound loaning. The term liquidity of loan indicates the state of quick realisation of loans from the borrowers.
C) Profitability: Commercial banks are profit-seeking institutions and hence they must also ensure that their funds earn profit for them.
D) Purpose Of the loan: At the time of granting an advanced the banker must enquire about the purpose of the loan.
These bankers should grant loans for productive purposes only and not for unproductive and illegal activities.
E) Diversification of risks: Risk of lending can be reduced by diversifying the loan and thus the associated risks.
Types Of Bank Account :
- Savings Account
- Current Account
- Loan Account /credit account
What is Hypothecation?
Hypothecation is the mode of creating a charge a movable property for payment of a debt.
It is a legal transaction whereby a specific movable property is made available by the borrower as security for a debt.
What is Lead bank scheme?
The Lead Bank Scheme was introduced in December 1969 to promote the integrated development of each district of the country.
Under this scheme, a commercial bank was assigned the lead role in a district and all other financial institutions works jointly under the lead banks.
What is Branch Banking?
Branch banking is a system of banking where a relatively big commercial bank undertakes banking activities with a network of branches.
A bank under this system may open branches both within and outside the country of its origin.
Thus branch banking is de-localised banking system where banking has its presence throughout the country and even outside the country.
What is Unit Banking?
Unit banking is a system of banking where an independent isolated bank undertakes banking function in a particular are.
A bank under this system has just one office with virtually no branches.