MEANING ACommercial bank is that financial institution which accepts deposits from thepeople and offers loans for the purpose of consumption or investment. Accordingto Indian Banking Companies Act,”Bankingcompany is one which transacts the business of banking which means theaccepting (for the purpose of lending or investment) of deposits of money fromthe public repayable on demand or otherwise and withdrawable by cheque,draft,order or otherwise. ” Therate of interest charged by the commercial banks (for the loans they offer ) ishigher than the rate of interest paid by them (for the deposits theyaccept).The difference between the two rates is called spread , which is thesource of profits for the banks.Spread=Rate of interest charged by banks for the loans the offer –Rate of interestpaid by the banks for the deposit they accept.
Thecommercial banks generate their profits by way of ‘spread’. FUNCTIONS Moderncommercial banks perform a variety of functions. They keep the wheels ofcommerce, trade and industry always revolving. Major functions of a commercialbank are: I.
Primary or Banking functionsII.Secondary or Non-Banking functions.III.
Subsidiary Activities I. Primary / Banking Functions: Commercial banks have 2 important banking functions. One isthey accept deposits and other is they advance loans. 1) Deposits: A bank accepts deposits from the public. Such deposits are of variousforms: (a)Demand Deposits:It includes current deposits and saving deposits .Depositswhich are withrawable on demand are called demand deposits.
(i)Current Account Deposits: These areusually opened by businessmen who have a number of regular transactions withthe bank , both deposits and withdrawals. No interest is paid on currentdeposits . (ii) Saving Account Deposits:Savings deposits are those from whichwithdrawals are not restricted as regards to the amount and the period. Saving Accounts areopened by salaried and other less income people. Interest is paid on savingdeposits but less than fixed deposits . (b)Time Deposits:Deposits withdrawable after expiry of a fixed period iscalled term deposits or fixed deposits.
A high rate of interest is paid onthem. (c) Recurring Account Deposits: In Recurring deposit, a specified amount is regularlydeposited by account holder, at an internal of usually a month. This is to formthe habit of small savings among the people. At the end of maturity period, theaccount holder gets a substantial amount.
Interest on this type of deposit isalmost equal to fixed deposits. 2) Loans and Advances: Banks not only mobilize money but also lend to its creditworthy customers for minimizing profits. Loans arid Advances are granted to: a)Businessand Trade: Banks lend money mainly forindustrial and commercial purposes.These lending may take different forms like: (i)Cash Credit (ii)Overdrafts (iii)Loans and advances (iv)Discounting of Bills of Exchange b) Loans to Agriculture Bank: Loans are grantedfor irrigation, purchase of equipments, inputs, cattle etc. c)Loans To Producers: Banks grant loans tothe producers for the purchase of plant and machinery .Banks advance loansmostly for productive purposes .d)Loans To Foreign Trade:Loans are granted to export and import in the form of direct loans, discountingof bills, guarantee for deferred payment etc. e)Cash Credit: On the basis of cashdeposits of the public , the banks build up their cash reserves.
But, aninteresting fact is that the banks advance loans many more times than the cashreserves.It is through this activity of the banks that they add to the supply ofmoney in the economy .This is popularly known as credit creation by the banks.
f)Miscellaneous Advances:Banks also gives advances like packing credits to exporters, export billpurchased or discounted, import finance, finance to self-employed, credit toweaker sections of society at concessional rates etc.II. Secondary / Non-banking Functions: A bank renders variousservices to consumers. Such services are known as non- banking or secondaryfunctions:1.Agency Services:Banks perform certain functions on behalf of their customers. While performingthese services, banks act as agents to their customers, hence these are calledas agency services.
Important agency functions are: (i) collection of bills, promissory notes andcheques; (ii) collection of dividends, interests,premiums, etc.; (iii) purchase and sale of shares andsecurities; (iv) acting as trustee or executor when so nominated;and (v) making regular payments such as insurancepremiums.2.Utility Services:A modern bank performsmany services of general nature to the public, such as: (i) issue of letters of credit, travellerscheques, bank drafts, circular notes; etc. (ii) safe keeping of valuables in safedeposit vaults; (iii) supplying trade information andstatistics;conducting economic surveys; and (iv) preparation of feasibility studies,project reports,etc. Banksin some foreign countries also underwrite issue of shares and make loans for long-termpurposes.III SubsidiaryActivities:Many commercial banks also undertake subsidiary activities such as: a.Housing Financeb.
Mutual Funds Intermediaryc.Merchant Bankingd.Venture Capital Funde.Factoring STRUCTURE Thecommercial banks can be broadly classified under two heads: 1. ScheduledBanks:ScheduledBanks refer to those banks which have been included in the Second Schedule ofRBI Act, 1934.
InIndia, scheduled commercial banks are of three types: (i) PublicSector Banks:Banks in which majority of stake are held by the govt.(Central or State) . Themain objective of these banks is to provide service to the society and not tomake profits. State Bank of India, Bank of India, Punjab National Bank, CanadaBank and Corporation Bank are some examples of public sector bank.
Public sector banks are of two types: (a)SBI and its subsidiaries; (b)Other nationalized banks. (ii) PrivateSector Banks:Banks in which majority of stake are held by private individuals . Their mainobjective is to earn profits.
ICICI Bank, HDFC Bank, IDBI Bank is some examplesof private sector banks. (iii) Foreign Banks: Banks with HeadOffice situated outside India. Their number has grown rapidly since 1991, whenthe process of economic liberalization had started in India. Bank of America,CITI Bank are examples of foreign banks. 2. Non-ScheduledBanks: Non-Scheduledbanks refer to those banks which are not included in the Second Schedule of RBI Act, 1934.
RECENTDEVELOPMENTS Thereare several developments in commercialbanking after independence. Several important developments have taken place incommercial banking after India became a free country1947. Their quantitativePleasures since 1951 are summed up in table as shown below (6.1). The developments are as follows: 1) Nationalisation of Banks: The objectivesof nationalisation were to control the heights of the economy and to meetprogressively the needs of development of the economy, in conformity withnational policy and objectives. The Government announced thenationalisation of 14 major commercial banks with effect from July, 1969.
Sixmore banks were nationalised in 1980. (Two banks were merged in 1993, so atpresent there are 19 nationalised banks). Thefollowing factors were responsible for nationalization of commercial banks in1969:1)To remove privateownership of commercial banks and concentration of economic power2)Urban Bias :Banks preferred setting up branches in Urban areas neglecting therural population.3)Neglect of agriculture sector :There was no concept of Priority sector lending. therefore the risky and less profitable areas were neglected .4)Violation of norms: The accountability of banks were not spelled out.
5)Speculative activities: In absence of restriction the banks in speculation ofhigher profits invested the public money in risky investments . Followingdevelopment have taken place since nationalisation in 1969 : 2)Expansion of branches : There has beenan unprecedented growth in the branch networkSince nationalisation. Compared to just 8262branch offices in 1969, the number of branchofficein 2008 has increased to76885 indicating agreater access to banking facilities to thecommonman. As a result, the population per bank office has reduced from 55,000 in1969toaround 15,000 in 2008.
3)Branch opening in rural and unbankedareas .There has beena qualitative change inbranchexpansion programme ever since the nationalisation of banks. Before nationalisation,there was a clear urban bias in the operations of banks. But afternationalisationthey have started moving towards rural and less developed areas. Thiswillbe clear from the fact that compared to just 22 per cent bank offices in ruralareas in1969,the percentage of rural branches bank improved to about 41 per cent in June, 2008.Thishas helped in checking imbalances in disbursement of banking finance in India. (iii) Depositmobilisation : There has been a substantial rise inthe rate of deposit mobilisationsincenationalisation.
The aggregate deposits of commercial banks have increased fromRs.4,665 crore in 1969 to around Rs. 31,97,000crore in December, 2008 formingmorethan80 per cent of the national income. Considering state-wise depositmobilisation, wefindMaharashtra leads all other states and accounts for around one-fifth of the aggregatedepositsreceived by the banks.
It is followed by Delhi, Uttar Pradesh, West Bengal,TamilNadu,Karnataka and Andhra Pradesh. These all together account for 65 per cent of theaggregatedeposits of the banks. (iv)Bank lending : There has been aspectacular rise in the bank lending since nationalisationofbanks in 1969. It has gone up from Rs. 3,399 crore in June, 1969 to about 23, crore in June, 2008.Thebank have taken special care of the priority sectors in their lendingoperations. In1969,agriculture, small scale industries and small retail trade accounted for about 15 percentof the commercial banks credit.
This percentage has gone up to about 44 per cent inMarch, 2008. (v)Promotion of new entrepreneurship : Banks, oflate, have been financing the schemes which promote entrepreneurship. Forexample, they have been activity participating in schemessuchas IRDP, TRYSEM, JRY, NRY etc.
Moreover, in their lending operations they nowgivehighpriority to the relevance of the project for the economy as a whole along withgenuinebusinessproductive requirements of the borrowers. PROGRESSWITH RESPECT TO EXPANSION OF BRANCHES Expansion ofBranches:8262Branches in 1969 to 97111 branches in 2012 Population perbank office:55000in 1969 to 12500 in 2012 Branches inrural areas: 22% of branches were in rural area in 1969& now 37% of branches are inrural areas. PROGRESSWITH RESPECT TO DEPOSIT MOBILIZATION DepositMobilization: Theaggregate of Scheduled commercial banks : 4665 crore in 1969 to approx60,00,000 crore in 2012 State Wise Data:Maharashtracontributes 23% of aggregate deposites, followed by Delhi,Uttar Pradesh ,WestBengal,Karnataka ,Tamil Nadu and Andhra Pradesh.
PROGRESSWITH RESPECT TO LENDING Lending :3399crore in June 1969 to 46,00,000 crore in June 2012 .Specialcare of priority sector .Lendingto Agriculture and Small Scale sector was 15% in 1969 to 35% of total credit inMarch 2011. REFERNCES · Wikipedia · Google · Books · Articles