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A commercial bank is a type of financial intermediary and a type of bank. It raises funds by collecting deposits from businesses and consumers via checkable deposits, savings deposits, and time deposits. It makes loans to businesses and consumers. It also buys corporate bonds and government bonds. Its primary liabilities are deposits and primary assets are loans and bonds.
For Eg: - Bank of Baroda, Canara Bank, Dena Bank etc.Commercial banks work with short term funds. Their working capital consists mainly of moneys deposited by customers and withdrawable by them on demand or on short notice. If a bank lends such moneys for long periods or keeps them blocked in any other way, it will be unable to meet the demands of its depositors for withdrawal of cash, and will be forced to go into liquidation. Commercial banks are the most important source of institutional credit in the money market. A commercial bank is a profit seeking business firm, dealing in money or rather dealing in claims to money. Commercial banks are the most important bank in India. The commercial banks account for over 80% of the total bank credit.
Functions of Commercial Banks
The commercial banks perform a number of vital functions. The functions of a commercial bank can be broadly classified into the followings:
(1) Accepting Deposits: -The bank collects deposits from the public. The deposits can be of different types – such as:
Savings Deposits: -
This type of deposits encourages saving habit among the public.
The rate of interest is low. At present it is about 5% p.a.
Withdrawals of deposits are allowed subject to certain restrictions.
This account is suitable to salary and wage earners.
This account can be opened in single name or in joint names.
Fixed Deposits : -
Lump sum amount is deposited at one time for a specific period.
Higher rate of interest is paid, which varies with the period of deposits.
Withdrawals are not allowed before the expiry of the period.
Current Deposits : -
This type of account is operated by businessmen.
Withdrawals are freely allowed.
No interest is paid. In fact, there are services charges.
The account holders can get the benefit of overdraft facility.
Recurring Deposits : -
This type of account is operated by salaried persons and pettytraders.
A certain sum of money is periodically deposited into the bank.
Withdrawals are permitted only after the expiry of certainperiod.
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A higher rate of interest is paid.
(2) Granting Advances: -
The bank advances loans to the business community and other members of the public. The rate charged is higher than what it pays on deposits. The difference in the interest rates (lending rate and the deposit rate) is its profit. The bank loans are:
Overdraft : -
This type of advances is given to current account holders. No separate account is maintained. All entries are made in the current account.
A certain amount is sanctioned as overdraft which can be withdrawn within a certain period of time, say three months or so.
Interest is charged on actual amount withdrawn.
An overdraft facility is granted against a collateral security.
It is sanctioned to businessman and firms.
Cash Credit : -
The client is allowed cash credit upto a specific limit fixed inadvances. It can be given to current account holders as well as to others who do not have an account with the bank.
Separate cash credit account is maintained.
Interest is charged on the amount withdrawn.
The advances are given for a longer period and a larger amount of loan is sanctioned than that of overdraft.
The cash credit is given against the security of tangible assets and/or guarantees.
Loans : -
Lump sum amounts are given. It is normally for short term, say a period of one year or medium term, say a period of five years.
Repayment of money can be in the form of installments spread over a period of time or in a lump sum amount.
The loans are granted to meet long term working capital needs.
Interest is charged on the actual amount sanctioned, whether withdrawn or not. The rate of interest depends upon the amount of loan and period of loan.
Loans are normally secured against tangible assets of the company.
Discounting of Bills : -
The banks can advance money by discounting or by purchasing bills of exchange both domestic and foreign bills.
The bank pays the bill amount to the drawer or the beneficiary of the bill by deducting usual discount charges.
On maturity, the bill is presented to the drawee or acceptor of the bill and the amount is collected.
The bank can get the bill rediscounted with the All India financial institutions such as Industrial Development Bank of
India (IDBI), Export Import Bank of India (EXIM Bank), etc.
(3) Agency Functions: -
The commercial bank acts as an agent of its customers. The commercial bank performs a number of agencies Functions, which includes:
Transfer of Funds: -The commercial bank transfer funds from one branch to another or from one place to another.
Collection of Cheques: -The commercial bank collects the money of the Cheques through clearing section of its customers. The commercial bank also collects money of the bills of exchange.
Periodic Payments: -On standing instructions of the client, the bank makes periodic payments in respect of electricity bills, rent, etc.
Advantages of Commercial banks
The commercial banks made significant progress, especially after 1969. This can be briefly stated as follows:
Branch Expansion : -There has been rapid expansion of public sector banks and other commercial banks’ branches since 1969. this is shown in the following table:
From the above table, it is clear that the number of commercial bank branches have increased by over 8 times between
1969 and 2004. About 48% commercial bank branches are in rural areas. As far as nationalized banks are concerned (excluding SBI and its subsidiaries) there were 4553 bank branches in 1969. The number of nationalized banks branches increased to 33,211 in June2004.It is to be noted that since 1969, branch banking has expanded not only in urban areas but also in rural areas there by bringing about a regional balance in banking business (although a major number of branches are in industrial states of Maharashtra, Gujarat, Tamil Nadu, West Bengal, and Karnataka).Apart from numerical increase in branches, there has been a qualitative change in branch expansion programme. RBI has now given freedom to set up bank branches without prior approval subject to certain conditions.
Deposit Mobilization: -The branch expansion led to massive Mobilization of deposits. The increase in bank deposits is shown in the following table:
From the above table, it is clear that there has been an increase in bank deposits by nearly 350 times between 1969 and
2004. The massive increase in deposits indicates the trust and confidence of the public in the banking sector.
Bank lending: -Bank lending has also increased over the years. In Dec. 2004, total bank credit outstanding of scheduled commercial banks was Rs. 1027009 crore as against Rs. 3399 crores in July1969 (an increase by 302 times). Apart from bank credit, the banks invest in government securities like treasury bills and dated Government securities, and other securities.
Advances to Priority sectors: -Commercial banks are advancing credit to the priority sector at low interest rates. The priority sector includes agriculture, SSIs, cottage industries and other weaker sections. At present, the total priority sector lending for commercial bank is 40% of the net bank credit. It was 15% in 1969.It is to be noted that priority sector lending by Public Sector Banks was 44% of the total net credit in 2003-04 as against the target of 40% stipulated (fixed) by RBI.
Agriculture Finance: -Prior to independence, there was hardly any emphasis on agricultural credit by commercial banks. After 1969emphasis were placed on agricultural credit. In 2003-04. Rs. 52,441crores was provided by commercial banks as agricultural credit. This works out at 60% of the total institutional agricultural credit.
Indian Banks Abroad: -A number of Indian banks are operating abroad. Large commercial banks have opened branches abroad, and are provided good banking services in the overseas countries. For instance, commercial banks like State Bank of India, Bank of Baroda, etc. have branches in several parts of the globe.
Increase in Operating Profits: -There has been considerable improvement in the performance of scheduled commercial banks (SCBs) including the nationalized banks. In 2003-04, the ratio of operating profits to total assets (of all SCBs) increased to 2.7%.The operating profits (as reported in economic survey2004-05), of all SCBs increased from nearly Rs. 40700 crore in 2002-03 to nearly Rs. 52700 crore in 2003-04. As far as the nationalized banks (including SBI and its subsidiaries) are concerned, the operating profits have increased from Rs. 29700 crore in 2002-03 to Rs. 39500 crore in 2003-04.
Disadvantages of Commercial banks
The performance of commercial banks is affected by certain limitations such as:
o High Non-performing Assets: Over the years, the non-performing assets of the scheduled commercial banks have been very high. In2003-04, the gross non-performing assets of all scheduled commercial banks stood at Rs. 64787 crore (which works out at 7.2% of the total gross advances). The 27 public sector banks alone had gross NPAs at over Rs. 51500 crore in 2003-04 (which works out at 7.8% of the total gross advances). The NPAs have adversely affected the performance of commercial banks in India. It is to be noted that there has been a decline in the NPAs during the past few years. For instance, there has been a significant decline in the non-performing assets of scheduled commercial banks (SCBs) in 2003-04, despite adoption of 90 day delinquency (misbehavior) norm from March 31, 2004. The gross NPAs declined from 4.0% of total assets in 2002-03 to 3.3% in 2003-04. As a result, the gross NPAs declined from over Rs. 68700 crore in 2002-03 to Rs. 64787 crore in 2003-04.
o Inefficiency and Corruption: -There has been inefficiency and corruption on the part of bank officials. The inefficiency is mainly due to poor selection and training of the bank personnel. The corruption is rampant (uncontrolled) in the banking sector (especially in public sector banks) due to lack of accountability on the part of bank managers, which is mainly due to political interference.
o Problem of Maintaining Rural Branches: -Commercial banks find it difficult to maintain rural branches. This is due to huge overheads in form of rent, and staff overheads. In several rural areas, the banking business is not adequate enough to cover the costs and expenses.
o Poor Infrastructure: -Banking business is adversely affected by poor infrastructure facilities. In several branches, especially in rural areas; there is use of outdated technology. This may be because; the bank branches in rural areas may find it difficult to install modern technology.
o Political Interference: -In public sector banks, there is good deal of political interference. This is especially true in selection of top bank officials, and in sanctioning the loans. There is good number of cases, where loans are sanctioned without adequate security due to political interference. If banks are to function efficiently and effectively, there should be least interference from the politicians.
o Subsidization of Credit: -Since nationalization of commercial banks, the priority sector has been receiving credit at subsidized interest rates. The bulk of the priority sector credit goes to the SSI sector and large farmers. The subsidized interest rates affect the overall profitability of the banks.