Commercial Banks by gauravjindal

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									          COMMERCIAL BANK


                  Assignment
             BUSINESS ECONOMICS




Submitted to-       Submitted by- Group 6
Dr. S.F.L. Mendes   PGP1, SEC-D
                    Apurva Choudhary   08pg219
                    Kapil Raina        08pg231
                    Neeraj Mishra      08pg243
Submitted on-       Rachana Kumar      08pg255
17/10/2008          Sanjeev Agarwal    08pg267
                    Sonam Jagga        08pg279
                       CONTENTS


TOPIC                                               PG. NO.

1. BANKING                                               3
2. COMMERCIAL BANKING                                    3
        Difference between various types of banks
        Features of commercial banks
3. INDIAN BANKING SCENARIO                               4
        Types of banks in India
        Overview of banks in India
4. CLASSIFICATION OF COMMERCIAL BANKS                    5
5. FUNCTIONS- PRIMARY                                    6
6. SECONDARY FUNCTIONS                                   10
7. ROLE OF COMMERCIAL BANKS IN                           11
        ECONOMIC DEVELOPMENT
8. CHALLENGES FACED BY BANKS IN INDIA                    13
9. MARKET POTENTIAL and CONCLUSION                       14




                               2
                              BANKING
THE NAME BANK DERIVES FROM THE ITALIAN WORD BANCO
“DESK/BENCH”, USED DURING THE RENAISSANCE BY FLORENTINE
BANKERS.

Banking operations started in India as early as 1870 with the establishment of
the Bank of Hindustan, considered as the first bank in India.




                COMMERCIAL BANKING
 A commercial bank is a type of financial intermediary and a type of bank. An
institution which accepts deposits, makes business loans, and offers related
services. Commercial banks also allow for a variety of deposit accounts, such
as checking, savings, and time deposit. These institutions are run to make a
profit and owned by a group of individuals.

Commercial banking is also known as business banking.



DIFFERENCE BETWEEN COMMERCIAL AND INVESTMENT
BANKS AND RETAIL BANKS

At some jurisdictions there is no separation between the two but some
jurisdictions believe that investment banks are generally limited to capital
market activities. Whereas commercial banks" deal with deposits and loans
from corporations or large businesses. This separation is no longer mandatory    Comment [s1]:


Commercial banking may also be seen as distinct from retail banking, which
involves the provision of financial services direct to consumers. Many banks
offer both commercial and retail banking services. Moreover retail banks
involve the provision of financial services direct to consumers.




                                      3
FEATURES OF COMMERCIAL BANKS

A commercial bank is the one that generally has the following features:

       ACCEPTS DEPOSITS, MAKES BUSINESS LOANS, AND OFFERS
       RELATED SERVICE
       ALLOWS A VARIETY OF DEPOSIT ACCOUNT SUCH AS CHECKING,
       SAVINGS AND TIME DEPOSITS.
       RUN TO MAKE A PROFIT AND OWNED BY A GROUP OF
       INDIVIDUALS
       OFFER SERVICES TO INDIVIDUALS AND ARE PROMARILY
       CONCERNED WITH RECEIVING DEPOSITS AND LENDING TO
       BUSINESSES




            INDIAN BANKING SCENARIO

For the past three decades India’s banking system has several outstanding
achievements to its credit. The most striking is its extensive reach. It is no
longer confined to only metropolitans or cosmopolitans in India. In fact,
Indian banking system has reached even to the remote corners of the country.
This is one of the main reasons of India’s growth process. The government’s
regular policy for Indian bank since 1969 has paid rich dividends with the
nationalisation of 14 major private banks of India.
Not long ago, an account holder had to wait for hours at the bank counters for
getting a draft or for withdrawing his own money. Today, he has a choice
.Gone are days when the most efficient transferred money from one branch to
other in two days.


TYPES OF BANKS

Banks' activities can be divided into retail banking, dealing directly with
individuals and small businesses; business banking, providing services to mid-
market business; corporate banking, directed at large business entities;
private banking, providing wealth management services to High Net Worth
Individuals and families; and investment banking, relating to activities on the
financial markets. Most banks are profit-making, private enterprises.
However, some are owned by government, or are non-profits.
Central banks are normally government owned banks, often charged with
quasi-regulatory responsibilities, e.g. supervising commercial banks, or
controlling the cash interest rate. They generally provide liquidity to the
banking system and act as Lender of last resort in event of a crisis.



                                      4
OVERVIEW OF INDIAN COMMERCIAL BANKS

  222 commercial banks in India
  Operating with 68,681 branches (March 06)
  Nearly 70% of branches are in rural/semi-urban areas
  Bulk of commercial bank finance is for short-term working capital needs of
  industry, trade, agriculture & personal segment. Foray into project finance
  also.
  Banks are supporting growth in the economy by financing productive
  sectors
  CD Ratio increased to 72.5% against benchmark 60%. Incremental CD
  Ratio of over 100% reflecting the strong underlying credit momentum.




CLASSIFICATION OF COMMERCIAL BANKS
              IN INDIA
  Banks in India can be categorized into non-scheduled banks and
  scheduled banks. Scheduled banks constitute of commercial banks and co-
  operative banks. There are about 67,000 branches of Scheduled banks
  spread across India. During the first phase of financial reforms, there was
  a nationalization of 14 major banks in 1969. This crucial step led to a shift
  from Class banking to Mass banking. Since then the growth of the
  banking industry in India has been a continuous process.
  Currently, India has 88 scheduled commercial banks (SCBs) - 27 public
  sector banks (that is with the Government of India holding a stake)after
  merger of New Bank of India in Punjab National Bank in 1993, 29 private
  banks (these do not have government stake; they may be publicly listed
  and traded on stock exchanges) and 31 foreign banks. They have a
  combined network of over 53,000 branches and 17,000 ATMs. According
  to a report by ICRA Limited, a rating agency, the public sector banks hold
  over 75 percent of total assets of the banking industry, with the private and
  foreign banks holding 18.2% and 6.5% respectively.
  Indusland Bank was the first private bank to be set up in India. IDBI, ING
  Vyasa Bank, SBI Commercial and International Bank Ltd, Dhanalakshmi
  Bank Ltd, Karur Vysya Bank Ltd, Bank of Rajasthan Ltd etc are some
  Private Sector Banks. Banks from the Public Sector include Punjab
  National bank, Vijaya Bank, UCO Bank, Oriental Bank, Allahabad Bank,
  Andhra Bank etc. ANZ Grindlays Bank, ABN-AMRO Bank, American
  Express Bank Ltd, Citibank etc are some foreign banks operating in India.


                                      5
   Community Development Banks: regulated banks that provide financial
   services and credit to under-served markets or populations.
   Postal Savings Banks: savings banks associated with national postal
   systems.
   Private Banks: manage the assets of high net worth individuals.
   Offshore Banks: banks located in jurisdictions with low taxation and
   regulation. Many offshore banks are essentially private banks.
   Savings Bank: in Europe, savings banks take their roots in the 19th or
   sometimes even 18th century. Their original objective was to provide easily
   accessible savings products to all strata of the population. In some
   countries, savings banks were created on public initiative, while in others
   socially committed individuals created foundations to put in place the
   necessary infrastructure. Nowadays, European savings banks have kept
   their focus on retail banking: payments, savings products, credits and
   insurances for individuals or small and medium-sized enterprises. Apart
   from this retail focus, they also differ from commercial banks by their
   broadly decentralised distribution network, providing local and regional
   outreach and by their socially responsible approach to business and
   society.
   Building societies and Landesbanks: conduct retail banking.
   Ethical Banks: banks that prioritize the transparency of all operations and
   make only what they consider to be socially-responsible investments.
   Islamic Banks: Banks that transact according to Islamic principle




     THE FUNCTIONS OF A COMMERICAL
             BANK- PRIMARY


They are divided into two categories:
   i) Primary functions,
   ii) Secondary functions




                                        6
                        Primary functions


The primary functions of a commercial bank include:

   a) Accepting deposits;
   b) Granting loans and advances;




a) Accepting deposits
The most important activity of a commercial bank is to mobilize deposits from
the public. People who have surplus income and savings find it convenient to
deposit the amounts with banks. Depending upon the nature of deposits,
funds deposited with bank also earn interest. Thus, deposits with the bank
grow along with the interest earned. If the rate of interest is higher, public are
motivated to deposit more funds with the bank. There is also safety of funds
deposited with the bank.

I) Current deposit
ii) Saving deposit
iii) Fixed deposit



   i) Current Deposit

Also called ‘demand deposit’, current deposit can be withdrawn by the
depositor at any time by cheques. Businessmen generally open current
accounts with banks. Current accounts do not carry any interest as the amount
deposited in these accounts is repayable on demand without any restriction.
The Reserve bank of India prohibits payment of interest on current accounts
or on deposits up to 14 Days or less except where prior sanction has been
obtained. Banks usually charge a small amount known as incidental charges
on current deposit accounts depending on the number of transaction.

   ii)   Savings Deposit

Savings deposit account is meant for individuals who wish to deposit small
amounts out of their current income. It helps in safe guarding their future and
also earning interest on the savings. A saving account can be opened with or
without cheque book facility. There are restrictions on the withdrawals from


                                        7
this account. Savings account holders are also allowed to deposit cheques,
drafts, dividend warrants, etc. drawn in their favour for collection by the bank.
To open a savings account, it is necessary for the depositor to be introduced by
a person having a current or savings account with the same bank.

   iii)   Fixed deposit
The term ‘Fixed deposit’ means deposit repayable after the expiry of a
specified period. Since it is repayable only after a fixed period of time, which is
to be determined at the time of opening of the account, it is also known as
time deposit. Fixed deposits are most useful for a commercial bank. Since they
are repayable only after a fixed period, the bank may invest these funds more
profitably by lending at higher rates of interest and for relatively longer
periods. The rate of interest on fixed deposits depends upon the period of
deposits. The longer the period, the higher is the rate of interest offered. The
rate of interest to be allowed on fixed deposits is governed by rules laid down
by the Reserve Bank of India.




b)Grant of loans and advances
The second important function of a commercial bank is to grant loans and
advances. Such loans and advances are given to members of the public and to
the business community at a higher rate of interest than allowed by banks on
various deposit accounts. The rate of interest charged on loans and advances
varies depending upon the purpose, period and the mode of repayment. The
difference between the rate of interest allowed on deposits and the rate
charged on the Loans is the main source of a bank’s income.




LOANS

A loan is granted for a specific time period. Generally, commercial banks grant
short-term loans. But term loans that is, loan for more than a year may also be
granted. The borrower may withdraw the entire amount in lump sum in
instalments. However, interest is charged on the full amount of loan. Loans
are generally granted against the
Security of certain assets. A loan may be repaid either in lump sum or in
instalments.

The loan can be granted as:
a) Demand loan, or
b) Term loan

a) Demand loan


                                        8
Demand loan is repayable on demand. In other words it is repayable at short
notice. The entire amount of demand loan is disbursed at one time and the
borrower has to pay interest on it. The borrower can repay the loan either in
lump sum (one time) or as agreed with the bank. Loans are normally granted
by the bank against tangible securities including securities like N.S.C., Kisan
Vikas Patra, Life Insurance policies and U.T.I. certificates.


b)    Term loans
Medium and long term loans are called ‘Term loans’. Term loans are granted
for more than one year and repayment of such loans is spread over a longer
period. The repayment is generally made in suitable instalments of fixed
amount. These loans are repayable over a period of 5 years and maximum up
to 15 years. Term loan is required for the purpose of setting up of new
business activity, renovation, modernisation, expansion/extension of existing
units, purchase of plant and machinery, vehicles, land for setting up a factory,
construction of factory building or purchase of other immovable assets. These
loans are generally secured against the mortgage of land, plant and
machinery, building and other securities. The normal rate of interest charged
For such loans is generally quite high.




ADVANCES

An advance is a credit facility provided by the bank to its customers. It differs
from loan in the sense that loans may be granted for longer period, but
advances are normally granted for a short period of time. Further the purpose
of granting advances is to meet the day to day requirements of business. The
rate of interest charged on advances varies from bank to bank. Interest is
charged only on the amount withdrawn and not on the sanctioned amount.




                                       9
               SECONDARY FUNCTIONS


Besides the primary functions of accepting deposits and lending money, banks
perform a number of other functions which are called secondary functions.
These are as follows –

       ISSUE IF CIRCULAR CHEQUES, TRAVELLERS CHEQUES,
      CIRCULAR NOTES ETC
      Circular notes are cheques on the issuing banker for certain round
      sums in his own currency. On the reverse side of a circular note is a
      letter addressed to the agents specifying the name of the holder and
      referring to a letter containing the specimen signature of the holder.
      Circular cheques is same as the circular notes, they are issued by the
      bank to their agents abroad to sell them to visitors to the country of the
      issuing bank.
      Traveler’s cheques are similar as circular cheques with only difference
      that they do not carry with them any letter of indication.
      SAFE CUSTODY OF VALUABLE
       Certain safe custody valuables are kept such as negotiable securities,
      jewellery, documents of titles, wills, deed boxes etc. .These may be used
      for a small fee. Each user is provided with the key of an individual safe.
      The safes are accessible at any time during the bank hours
      BANKER’S DRAFTS AND LETTERS OF CREDIT:
      A banker’s draft is an order, addressed by one office of a bank to the
      other of its branches or any other bank to pay a specified sum to the
      person concerned.
      Issuing demand drafts and pay orders
      Providing customers with facilities of foreign exchange.
      Transferring money from one place to another; and from one branch to
      another branch of the bank.
      Standing guarantee on behalf of its customers, for making payments for
      purchase of goods, machinery, vehicles etc.
      Collecting and supplying business information
      Providing reports on the credit worthiness of customers.




                                      10
        ROLE OF COMMERCIAL BANKS IN
             ECONOMIC GROWTH


The economic development is defined as a progress whereby an economy’s
real national income is carried on from a lower to a higher over a long period.
The progress of economic development capital resources besides other
structural changes like improvement in skill and efficiency of manpower,
better organization , better health, education, etc. Capital formation is the
most significant variable of economic development. Commercial banks play a
very vital role in economic growth of any country.
Commercial banks help the economy by capital formation. Capital formation
can be divided into three stages, i.e., savings, financing and investment.
Through these different stages of capital formation, commercial banks
contribute to economic development.
There are there to provide the new firms with the investment when they need
one for their establishment or expansion. Commercial banks actually do not
allow the money to remain idle in the economy. They encouraged the people
to investment their savings that are then used by the banks for the purpose of
funding
Commercial banks help the economy to grow in these ways:-
MOBILIZATION OF SAVINGS

The commercial banks are important agencies for generation of saving from
the community. By inspiring confidence in people and by offering them
certain incentives, viz. Interest on deposit, safe custody of valuables, they
stimulate savings.


CREATION OF CREDIT

Banks create credit and add to the money supply. Credit expansion provides
more funds to entrepreneurs who lead to more investment and more
production. The expansion of bank credit, thus, offers more financial
resources to industries to contribute for greater economic development.


CHANNELISING THE FUNDS INTOPRODUCTIVE INVESTMENT

Finance alone is not sufficient for economic development unless accompanied
by investment. Commercial banks not only provide funds, but also, productive
investment. A developing country needs a continuous supply of investment.


                                      11
BANKS FACILITATE UNIFORM GROWTH OF ALL REGIONS

Commercial banks not only act as creators but also as regulators of credit.
These banks transfer the money in the region where they are required from
regions where they are available in ample amount. These distributions of
funds between regions pave way for development of backward regions.


FULLER UTILISATION OF RESOURCES

Commercial banks are analytical agents which can create opportunities for the
development of natural resources and provide employment on a large scale.
The growth of underdevelopment economy calls for full employment of man
and material. For the full utilisation of resources, the commercial banks help
in development of small scale industries. The small scale industries employ
labour intensive method of production and so employment potential is
greater. So, it helps in economy development. Banks provide finance for these
investments and even, help with suggestions and technologies.


ENCOURGE RIGHT TYPE OF INDUSTRIES

Banks prefer to advance loans to only to those entrepreneurs whose products
are greatly needed by the public. Commercial banks give priority to those
industries which have new methods, to introduce better machinery and to
improve better machinery and to improve working conditions. Thus, banks
encourage the growth of right type of industries. Banks not only make use of
the productive utilisation of idle money but also see to is that funds are
utilized in a manner to obtain optimum productivity.


FINANCE TO GOVERNMENT

Government is the promoter of industries in underdeveloped countries .In
addition to the development activities; it needs money for setting up of
industries. Commercial banks provide long-term credit to government by
investing their funds in government securities and short-term finance by
purchasing Treasury Bills.




                                     12
     CHALLENGES FACING COMMERCIAL
       BANKING INDUSTRY IN INDIA


The banking industry in India is undergoing a major transformation due
to changes in economic conditions and continuous deregulation. These
multiple changes happening one after other has a ripple effect on a bank.



It is trying to graduate from completely regulated sellers market to completed
deregulated customers market.




Deregulation: This continuous deregulation has made the Banking market
extremely competitive with greater autonomy, operational flexibility, and
decontrolled interest rate and liberalized norms for foreign exchange.
The deregulation of the industry coupled with decontrol in interest rates has
led to entry of a number of players in the banking industry. At the same time
reduced corporate credit off take thanks to sluggish economy has resulted in
large number of competitors battling for the same pie.

New rules: As a result, the market place has been redefined with new rules of
the game. Banks are transforming to universal banking, adding new
channels with lucrative pricing and freebees to offer. Natural fall out of


                                     13
this has led to a series of innovative product offerings catering to various
customer segments, specifically retail credit.
Efficiency: This in turn has made it necessary to look for efficiencies in the
business. Banks need to access low cost funds and simultaneously improve the
efficiency. The banks are facing pricing pressure, squeeze on spread and have
to give thrust on retail assets
Diffused Customer loyalty: This will definitely impact Customer
preferences, as they are bound to react to the value added offerings.
Customers have become demanding and the loyalties are diffused. There are
multiple choices, the wallet share is reduced per bank with demand on
flexibility and customization. Given the relatively low switching costs;
customer retention calls for customized service and hassle free, flawless
service delivery.
Misaligned mindset: These changes are creating challenges, as employees
are made to adapt to changing conditions. There is resistance to change from
employees and the Seller market mindset is yet to be changed coupled with
Fear of uncertainty and Control orientation. Acceptance of technology is
slowly creeping in but the utilization is not maximised.
Competency Gap: Placing the right skill at the right place will determine
success. The competency gap needs to be addressed simultaneously otherwise
there will be missed opportunities. The focus of people will be on doing work
but not providing solutions, on escalating problems rather than solving
them and on disposing customers instead of using the opportunity to cross
sellers .




   MARKET POTENCIAL and CONCLUSION


While this growth has been very impressive, the potential banking market
waiting to be tapped in India is still fairly huge. Out of the 203 million Indian
households, three-fourths, or 147 million, are in rural areas and 89 million are
farmer households. In this segment, 51.4 per cent have no access to formal or
informal sources of credit, while 73 per cent have no access to formal sources
of credit.

In fact, according to a report by Boston Consultancy Group, India has the
second largest financially excluded households of about 135 million, which is
next only to china. Also, about 60 million new households are expected to be
added to India's bankable pool between 2005 and 2009. With such a large
untapped market, the Indian banking industry is estimated to grow rapidly,
faster than even china in the long run.




                                       14
THE 2008-09 FISCAL YEAR

With the economy continuing to grow at a rapid rate, the Indian banking
industry has also continued its growth story. According to the Reserve Bank of
India (RBI), credit extended by the Indian banking sector grew by 25.3 per
cent at the end of May 23, 2008, with the outstanding credit estimated at US$
551.6 billion.

Banks have disbursed US$ 3.71 billion of advances between April 1 and May
23, compared to a decline of US$ 11.07 billion in the corresponding period last
year.

Simultaneously, deposits have recorded a year-on-year growth of 23.2 per
cent to US$ 754.61 billion as on May 23, 2008. There has been an increase of
US$ 10.02 billion in deposits of the Indian banking system between April1 to
May 23, compared to a decline of US$ 317.86 million in the corresponding
period last year.




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