commercial banking
TRANSCRIPT
PRESENTATION
ON
“COMMERCIAL BANKING”
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BANK
A bank is a financial institution that accepts deposits and channels those deposits into lending activities. Banks primarily provide financial services to customers while enriching investors. Banks are important players in financial markets and offer services such as investment funds and loans. Government restrictions on financial activities by banks vary over time and location.
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A BRIEF HISTORY
Ancient Indian writings mention banking practiced by Vaishya, the merchants and landowners, who are ranked third of four among the castes. By the time of Buddha, circa 500 BCE, even top-ranked Brahmins were involved in banking.
Some indigenous bankers were also there like sahukars, shroffs, seths, baniye who did the work on lending money on interest.
After economic liberalization in the 1990s, more than 50 major domestic and foreign commercial banks operate in India, as well as many state-owned banks, co-op banks and smaller commercial banks. Post liberalization, state-run banks are divesting government capital.
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PHASES OF INDIAN BANKING Bank of Hindustan (1770)
General bank of India (1786)
Presidency bank and bank of Bengal (1809)
Bank of Bombay (1840)
Bank of Madras (1843)
Imperial bank of India (1921)
RBI (1949)
Pre nationalization (1786-1969)
Post nationalization (1969-1991)
Liberalization phase (1992)
BNP paribus bank (1860)
HDFC bank (1994)
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STRUCTURE OF INDIAN BANKING IN INDIA
RBI
COMMERCIALBANKS
CO-OPERATIVEBANKS
DEVELOPMENTBANKS
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COMMERCIAL BANK
A commercial bank is a type of financial intermediary and a type of bank. Commercial banking is also known as business banking. It is a bank that provides checking accounts, savings accounts, money market accounts, accepts time deposits and primarily deals with deposits and loans from corporations or large businesses.
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ROLE OF COMMERCIAL BANKS Processing of payments by way of telegraphic transfer, internet banking.
issuing drafts and cheques.
accepting money on term deposit.
lending money by overdraft, installment loan, or other means
providing documentary and standby letter of credit, guarantees, performance bonds, securities underwriting commitments etc.
safekeeping of documents and other items in safe deposit boxes
sale, distribution or brokerage, with or without advice, of insurance, unit trusts and similar financial products as a “financial supermarket”
traditionally, large commercial banks also underwrite bonds, and make markets in currency, interest rates, and credit-related securities, but today large commercial banks usually have an investment bank arm that is involved in the mentioned activities.
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COMMERCIAL BANKS ARE DIVIDED AS:-
COMMERCIALBANKS
SCHEDULEDCOMMERCIAL BANKS
NON- SCHEDULEDCOMMERCIAL BANKS
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Scheduled banks in India" means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934), but does not include a co-operative bank".
Non-scheduled bank in India means a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949), which is not a scheduled bank.
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PUBLIC SECTOR SCHEDULED BANKS
State Bank of India
State Bank of Bikaner and Jaipur
State Bank of Hyderabad
State Bank of Indore
State Bank of Mysore
State Bank of Saurashtra
State Bank of Travancore
Andhra Bank
Allahabad Bank
Bank of Baroda
Bank of India
Bank of Maharashtra
Canara Bank
Corporation Bank
Dena Bank
Indian Overseas Bank
Indian Bank
Oriental Bank of Commerce
Punjab National Bank
Punjab and Sind Bank
Syndicate Bank
Union Bank of India
United Bank of India
UCO Bank
Vijaya Bank
Central Bank of India
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PRIVATE SECTOR SCHEDULED BANKS
ING Vysya Bank Ltd
Axis Bank Ltd
Indusind Bank Ltd
ICICI Bank Ltd
South Indian Bank
HDFC Bank Ltd
Centurion Bank Ltd
Bank of Punjab Ltd
IDBI Bank Ltd
Bank of Rajasthan
SCHEDULED FOREIGN BANKS
American Express Bank Ltd.
ANZ Gridlays Bank Plc.
Bank of America NT & SA
Bank of Tokyo Ltd.
Banquc Nationale de Paris
Barclays Bank Plc
Citi Bank N.C.
Deutsche Bank A.G.
Hongkong and Shanghai Banking Corporation
Standard Chartered Bank.
The Chase Manhattan Bank Ltd.
Dresdner Bank AG.
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RBI – THE REGULATORY OVER BANKS
The Reserve Bank of India is the central bank of India and the regulatory body for the banking sector. It controls the monetary policy of the rupee as well as US-Dollar currency reserves in the country. The institution was established on 1 April 1935 during the British-Raj in accordance with the provisions of the Reserve Bank of India Act, 1934 and plays an important part in the development strategy of the government.
For the smooth running of the economy, RBI controls inflation, FOREX reserves and exercise several instruments like CRR, SLR, PLR, bank rates, repo rate, reserve repo rate etc. It also deals in money market instruments to inject liquidity and for funding big corporate houses.
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RBI FUNCTIONS
Monetary Authority
Manager of exchange control
Regulator and supervisor of the financial system
Developmental role
Issuer of currency
Bankers bank
Govt. bank
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CREDIT CREATION BY COMMERCIAL BANKS
The commercial banks are the second most important sources of money supply after RBI. The money that commercial banks supply is called credit money.
The process of 'Credit Creation' begins with banks lending money out of primary deposits. Primary deposits are those deposits which are deposited in banks. In fact banks cannot lend the entire primary deposits as they are required to maintain a certain proportion of primary deposits in the form of reserves with the RBI under RBI & Banking Regulation Act. After maintaining the required reserves, the bank can lend the remaining portion of primary deposits. Here bank's lend the money and the process of credit creation starts.
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EXAMPLE: Suppose there are a number of Commercial Banks in the Banking
System – Bank 1, Bank 2, Bank 3, & So on.
To begin with let us suppose that an individual "A" makes a deposit of Rs. 100 in bank 1. Bank "1" is required to maintain a Cash Reserve Requirement of 5% (Prevailing Rate) which is decided by the RBI's Monetary Policy from the deposits made by 'A'. Bank "1" is required to maintain a cash reserve of Rs. 5 (5% of 100). The bank has now lendable funds of Rs. 95(100 – 5). Let the Bank "1" lend Rs. 95 to a borrower; say B. the method of lending is the same that is bank 1 opens an account in the name of the borrower cheque for the loan amount. At the end of the process of deposits & lending, the balance sheet of bank reads as given below:-
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BALANCE SHEET OF BANK 1:
Liabilities Amount Assets Amount
A's deposits 100 Cash Reserve 5
Loan to "B" 95
Total 100 Total 100
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Now suppose that money that borrowed from bank "1" is paid to individual "C" in settlement of his past debts. The individual "C" deposits the money in his bank say, bank 2. Now bank 2 carries out its banking transaction.
It keeps a cash reserve to the extend of 5%, that is Rs. 4.75 (5% of 95) and lend Rs. 90.5 to a borrower D. at the end of the process the balance sheet of Bank 2 will be look like:-
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BALANCE SHEET OF BANK 2:
Liabilities Amount Assets Amount
B's deposits 95 Cash Reserve 4.75
Loan to "C" 90.5
Total 95 Total 95
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THE COMBINED BALANCE SHEET OF BANKS
The amount advanced to D will return ultimately to the banking system, as described in case of B and the process of deposits and credit creation will continue until the reserve with the banks is reduced to zero.
The final picture that would emerge at the end of the process of deposit & credit creation by the banking system is presented in the consolidated balance sheet of all banks are as under:-
Bank Liabilities Deposit
s
Assets Credits
Reserve
Total Assets
Bank 1
100 95 5 100
Bank 2
95 90.5 4.75 95
Bank 3
90.5 85.98 4.52 90.5
- - - - -
- - - - -
Bank n
00 00 00 00
Total 2,000 1,900 100 2,000
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It can be seen from the combined balance sheet that a primary deposits of Rs. 100 in a bank 1 leads to the creation of the total deposit of Rs. 2,000. The combined balance sheet also shows that the banks have created a total credit of Rs. 2,000. And maintained a total cash reserve of Rs.100.Which equals the primary deposits. The total deposit created by the commercial banks constitutes the money supply by the banks.
To conclude, we can say that credit creation by banks is one of the important & only sources to generate income. And when the reserve requirement increased by the central bank it would directly affect on the credit creation by bank because then the lendable funds with the bank decreases and vice versa.
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