Commercial bank is that financial institution which accepts deposits from the
people and offers loans for the purpose of consumption or investment.
to Indian Banking Companies Act,”Banking
company is one which transacts the business of banking which means the
accepting (for the purpose of lending or investment) of deposits of money from
the public repayable on demand or otherwise and withdrawable by cheque
,draft,order or otherwise. ”
rate of interest charged by the commercial banks (for the loans they offer ) is
higher than the rate of interest paid by them (for the deposits they
accept).The difference between the two rates is called spread , which is the
source of profits for the banks.
Rate of interest charged by banks for the loans the offer –Rate of interest
paid by the banks for the deposit they accept.
commercial banks generate their profits by way of ‘spread’.
commercial banks perform a variety of functions. They keep the wheels of
commerce, trade and industry always revolving. Major functions of a commercial
Primary or Banking functions
Secondary or Non-Banking functions.
I. Primary / Banking Functions: Commercial banks have 2 important banking functions. One is
they accept deposits and other is they advance loans.
1) Deposits: A bank accepts deposits from the public. Such deposits are of various
(a)Demand Deposits:It includes current deposits and saving deposits .Deposits
which are withrawable on demand are called demand deposits.
(i)Current Account Deposits: These are
usually opened by businessmen who have a number of regular transactions with
the bank , both deposits and withdrawals. No interest is paid on current
(ii) Saving Account Deposits:
Savings deposits are those from which
withdrawals are not restricted as regards to the amount and the period. Saving Accounts are
opened by salaried and other less income people. Interest is paid on saving
deposits but less than fixed deposits .
(b)Time Deposits:Deposits withdrawable after expiry of a fixed period is
called term deposits or fixed deposits. A high rate of interest is paid on
(c) 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.
2) Loans and Advances: Banks not only mobilize money but also lend to its credit
worthy customers for minimizing profits. Loans arid Advances are granted to:
and Trade: Banks lend money mainly for
industrial and commercial purposes.These lending may take different forms like:
(iii)Loans and advances
(iv)Discounting of Bills of Exchange
b) Loans to Agriculture Bank: Loans are granted
for irrigation, purchase of equipments, inputs, cattle etc.
Loans To Producers: Banks grant loans to
the producers for the purchase of plant and machinery .Banks advance loans
mostly for productive purposes .
Loans To Foreign Trade:
Loans are granted to export and import in the form of direct loans, discounting
of bills, guarantee for deferred payment etc.
Cash Credit: On the basis of cash
deposits of the public , the banks build up their cash reserves. But, an
interesting fact is that the banks advance loans many more times than the cash
reserves.It is through this activity of the banks that they add to the supply of
money in the economy .This is popularly known as credit creation by the banks
Banks also gives advances like packing credits to exporters, export bill
purchased or discounted, import finance, finance to self-employed, credit to
weaker sections of society at concessional rates etc.
II. Secondary / Non-banking Functions: A bank renders various
services to consumers. Such services are known as non- banking or secondary
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:
(i) collection of bills, promissory notes and
(ii) collection of dividends, interests,
(iii) purchase and sale of shares and
(iv) acting as trustee or executor when so nominated;
(v) making regular payments such as insurance
A modern bank performs
many services of general nature to the public, such as:
(i) issue of letters of credit, travellers
cheques, bank drafts, circular notes; etc.
safe keeping of valuables in safe
supplying trade information and
statistics;conducting economic surveys; and
preparation of feasibility studies,
in some foreign countries also underwrite issue of shares and make loans for long-term
Many commercial banks also undertake subsidiary activities such as:
Mutual Funds Intermediary
Venture Capital Fund
commercial banks can be broadly classified under two heads:
Banks refer to those banks which have been included in the Second Schedule of
RBI Act, 1934.
India, scheduled commercial banks are of three types:
Banks in which majority of stake are held by the govt.(Central or State) . The
main objective of these banks is to provide service to the society and not to
make profits. State Bank of India, Bank of India, Punjab National Bank, Canada
Bank and Corporation Bank are some examples of public sector bank.
Public sector banks are of two types:
SBI and its subsidiaries;
Other nationalized banks.
Banks in which majority of stake are held by private individuals . Their main
objective is to earn profits. ICICI Bank, HDFC Bank, IDBI Bank is some examples
of private sector banks.
(iii) Foreign Banks: Banks with Head
Office situated outside India. Their number has grown rapidly since 1991, when
the process of economic liberalization had started in India. Bank of America,
CITI Bank are examples of foreign banks.
banks refer to those banks which are not included in the Second Schedule of RBI Act, 1934.
are several developments in commercial
banking after independence. Several important developments have taken place in
commercial banking after India became a free country1947. Their quantitative
Pleasures since 1951 are summed up in table as shown below (6.1).
developments are as follows:
1) Nationalisation of Banks: The objectives
of nationalisation were to control the heights of the economy and to meet
progressively the needs of development of the economy, in conformity with
national policy and objectives. The Government announced the
nationalisation of 14 major commercial banks with effect from July, 1969.Six
more banks were nationalised in 1980. (Two banks were merged in 1993, so at
present there are 19 nationalised banks).
following factors were responsible for nationalization of commercial banks in
To remove private
ownership of commercial banks and concentration of economic power
Urban Bias :Banks preferred setting up branches in Urban areas neglecting the
Neglect of agriculture sector :There was no concept of Priority sector lending
. therefore the risky and less profitable areas were neglected .
Violation of norms: The accountability of banks were not spelled out.
Speculative activities: In absence of restriction the banks in speculation of
higher profits invested the public money in risky investments .
development have taken place since nationalisation in 1969 :
2)Expansion of branches : There has been
an unprecedented growth in the branch network
nationalisation. Compared to just 8262
branch offices in 1969, the number of branch
in 2008 has increased to
76885 indicating a
greater access to banking facilities to the
man. As a result, the population per bank office has reduced from 55,000 in
around 15,000 in 2008.
Branch opening in rural and unbanked
areas .There has been
a qualitative change in
expansion programme ever since the nationalisation of banks. Before
there was a clear urban bias in the operations of banks. But after
they have started moving towards rural and less developed areas. This
be clear from the fact that compared to just 22 per cent bank offices in rural
the percentage of rural branches bank improved to about 41 per cent in June, 2008.
has helped in checking imbalances in disbursement of banking finance in India.
mobilisation : There has been a substantial rise in
the rate of deposit mobilisation
nationalisation. The aggregate deposits of commercial banks have increased from
4,665 crore in 1969 to around Rs. 31,97,000
crore in December, 2008 forming
80 per cent of the national income. Considering state-wise deposit
Maharashtra leads all other states and accounts for around one-fifth of the aggregate
received by the banks. It is followed by Delhi, Uttar Pradesh, West Bengal,
Karnataka and Andhra Pradesh. These all together account for 65 per cent of the
deposits of the banks.
Bank lending : There has been a
spectacular rise in the bank lending since nationalisation
banks in 1969. It has gone up from Rs. 3,399 crore in June, 1969 to about 23, crore in June, 2008.
bank have taken special care of the priority sectors in their lending
agriculture, small scale industries and small retail trade accounted for about 15 per
of the commercial banks credit. This percentage has gone up to about 44 per cent in
Promotion of new entrepreneurship : Banks, of
late, have been financing the schemes which promote entrepreneurship. For
example, they have been activity participating in schemes
as IRDP, TRYSEM, JRY, NRY etc. Moreover, in their lending operations they now
priority to the relevance of the project for the economy as a whole along with
productive requirements of the borrowers.
WITH RESPECT TO EXPANSION OF BRANCHES
Branches in 1969 to 97111 branches in 2012
in 1969 to 12500 in 2012
: 22% of branches were in rural area in 1969& now 37% of branches are in
WITH RESPECT TO DEPOSIT MOBILIZATION
aggregate of Scheduled commercial banks : 4665 crore in 1969 to approx
60,00,000 crore in 2012
State Wise Data
contributes 23% of aggregate deposites, followed by Delhi,Uttar Pradesh ,West
Bengal,Karnataka ,Tamil Nadu and Andhra Pradesh.
WITH RESPECT TO LENDING
crore in June 1969 to 46,00,000 crore in June 2012 .
care of priority sector .
to Agriculture and Small Scale sector was 15% in 1969 to 35% of total credit in