COMMERCIAL BANKING

PRESENTED BY
KAJAL BIJAY BEHERA
TO
PROF.PRASHANT KOKNE
CONTENTS
MEANING OF COMMERCIAL
BANKING
FUNCTION OF COMMERCIAL
BANKING
TYPES OF BANKS
IMPORTANCE OF COMMERCIAL
BANKS
BALANCE SHEET OF COMMERCIAL
BANKS

MEANING OF COMMERCIAL
BANKING
A Commercial bank is a type of
BANK / Financial Institution that provides
services such as accepting deposits,
making business loans, and offering basic
investment products.
"Commercial bank" can also refer to a
bank, or a division of a large bank, which
more specifically deals with deposit and
loan services provided to corporations or
large/middle-sized business - as opposed
to individual members of the public/small
business

Functions of Commercial Banks:

1. Accepting Deposits
2. Advancing Deposits
3. Discounting Biis of Exchang
4. Agency Services
5. General Services

Commercial Banks: Primary and Secondary

Functions of Commercial Banks!
(1) Primary Function:
1. Accepting Deposits:
It is the most important function of commercial banks.
They accept deposits in several forms according to
requirements of different sections of the society.
The main kinds of deposits are:
(i) Current Account Deposits or Demand Deposits:
These deposits refer to those deposits which are
repayable by the banks on demand:
1. Such deposits are generally maintained by businessmen
with the intention of making transactions with such
deposits.
2. They can be drawn upon by a cheque without any
restriction.
3. Banks do not pay any interest on these accounts.
Rather, banks impose service charges for running these
accounts.
(ii) Fixed Deposits or Time Deposits:
Fixed deposits refer to those deposits, in which the
amount is deposited with the bank for a fixed period of
time.
1. Such deposits do not enjoy cheque-able facility.
2. These deposits carry a high rate of interest.

Basis Demand Fixed

Deposits Deposits
Cheque They are They are
facility chequeable non-
deposits. chequeable
deposits.

Interest They do They carry

payments not carry interest
any which varies
interest. directly with
the period of
time.

Number of The Depositor

transactions depositor generally
can make makes only
any number two
of transactions:
transactions (i) Deposit
for deposit of Money in
or with the
drawl of beginning;
money.
(ii)
Withdrawal
of money on
maturity.

(iii) Saving Deposits:

These deposits combine features of both current
account deposits and fixed deposits:
1. The depositors are given cheque facility to withdraw
money from their account. But, some restrictions are
imposed on number and amount of withdrawals, in order
to discourage frequent use of saving deposits.
2 .They carry a rate of interest which is less than interest
rate on fixed deposits. It must be noted that Current
Account deposits and saving deposits are chequable
deposits, whereas, fixed deposit is a non-chequable
deposit.
2. Advancing of Loans:
The deposits received by banks are not allowed to remain
idle. So, after keeping certain cash reserves, the balance is
given to needy borrowers and interest is charged from
them, which is the main source of income for these banks.
Different types of loans and advances made by
Commercial banks are:
(i) Cash Credit:
Cash credit refers to a loan given to the borrower against
his current assets like shares, stocks, bonds, etc. A credit
limit is sanctioned and the amount is credited in his
account. The borrower may withdraw any amount within
his credit limit and interest is charged on the amount
actually withdrawn.
(ii) Demand Loans:
Demand loans refer to those loans which can be recalled
on demand by the bank at any time. The entire sum of
demand loan is credited to the account and interest is
payable on the entire sum.
(iii) Short-term Loans:
They are given as personal loans against some collateral
security. The money is credited to the account of borrower
and the borrower can withdraw money from his account
and interest is payable on the entire sum of loan granted.

(2) Secondary Functions:

1. Overdraft Facility:
It refers to a facility in which a customer is allowed to
overdraw his current account upto an agreed limit. This
facility is generally given to respectable and reliable
customers for a short period. Customers have to pay
interest to the bank on the amount overdrawn by them.
2. Discounting Bills of Exchange:
It refers to a facility in which holder of a bill of exchange
can get the bill discounted with bank before the maturity.
After deducting the commission, bank pays the balance to
the holder. On maturity, bank gets its payment from the
party which had accepted the bill.
3. Agency Functions:
Commercial banks also perform certain agency functions
for their customers. For these services, banks charge some
commission from their clients.
Some of the agency functions are:
(i) Transfer of Funds:
Banks provide the facility of economical and easy
remittance of funds from place-to-place with the help of
instruments like demand drafts, mail transfers, etc.
(ii) Collection and Payment of Various Items:
Commercial banks collect cheques, bills, interest,
dividends, subscriptions, rents and other periodical
receipts on behalf of their customers and also make
payments of taxes, insurance premium, etc. on standing
instructions of their clients.
(iii) Purchase and Sale of Foreign Exchange:
Some commercial banks are authorized by the central
bank to deal in foreign exchange. They buy and sell
foreign exchange on behalf of their customers and help in
promoting international trade.
(iv) Purchase and Sale of Securities:
Commercial banks buy and sell stocks and shares of
private companies as well as government securities on
behalf of their customers.
(v) Income Tax Consultancy:
They also give advice to their customers on matters
relating to income tax and even prepare their income tax
returns.
(vi) Trustee and Executor:
Commercial banks preserve the wills of their customers as
trustees and execute them after their death as executors.
(vii) Letters of Reference:
They give information about the economic position of
their customers to traders and provide the similar
information about other traders to their customers.
4. General Utility Functions:
Commercial banks render some general utility services
like:
(i) Locker Facility:
Commercial banks provide facility of safety vaults or
lockers to keep valuable articles of customers in safe
custody.
(ii) Travellers Cheques:
Commercial banks issue travelers cheques to their
customers to avoid risk of taking cash during their
journey.
(iii) Letter of Credit:
They also issue letters of credit to their customers to
certify their creditworthiness.
(iv) Underwriting Securities:
Commercial banks also undertake the task of
underwriting securities. As public has full faith in the
creditworthiness of banks, public do not hesitate in
buying the securities underwritten by banks.
(v) Collection of Statistics:
Banks collect and publish statistics relating to trade,
commerce and industry. Hence, they advice customers on
financial matters. Commercial banks receive deposits
from the public and use these deposits to give loans.
However, loans offered are many times more than the
deposits received by banks. This function of banks is
known as Money Creation.

TYPES OF COMMERCIAL BANK

1. DEPOSIT BANKS
 2. INDUSTRIAL BANKS
3. SAVINGS BANKS
4. EXCHANGE BANKS
5. AGRICULTURE BANKS
6. MISCELLANEOUS

Commercial Banks: 7
Important Role of
Commercial Banks in a
Developing Country
1. Mobilising Saving for Capital Formation:
The commercial banks help in mobilising savings through
network of branch banking. People in developing
countries have low incomes but the banks induce them to
save by introducing variety of deposit schemes to suit the
needs of individual depositors. They also mobilise idle
savings of the few rich. By mobilising savings, the banks
channelise them into productive investments. Thus they
help in the capital formation of a developing country.

2. Financing Industry:
The commercial banks finance the industrial sector in a
number of ways. They provide short-term, medium-term
and long-term loans to industry. In India they provide
short-term loans. Income of the Latin American countries
like Guatemala, they advance medium-term loans for one
to three years. But in Korea, the commercial banks also
advance long-term loans to industry.

In India, the commercial banks undertake short-term and

medium-term financing of small scale industries, and also
provide hire- purchase finance. Besides, they underwrite
the shares and debentures of large scale industries. Thus
they not only provide finance for industry but also help in
developing the capital market which is undeveloped in
such countries.

3. Financing Trade:
The commercial banks help in financing both internal and
external trade. The banks provide loans to retailers and
wholesalers to stock goods in which they deal. They also
help in the movement of goods from one place to another
by providing all types of facilities such as discounting and
accepting bills of exchange, providing overdraft facilities,
issuing drafts, etc. Moreover, they finance both exports
and imports of developing countries by providing foreign
exchange facilities to importers and exporters of goods.

4. Financing Agriculture:
The commercial banks help the large agricultural sector in
developing countries in a number of ways. They provide
loans to traders in agricultural commodities. They open a
network of branches in rural areas to provide agricultural
credit. They provide finance directly to agriculturists for
the marketing of their produce, for the modernisation and
mechanisation of their farms, for providing irrigation
facilities, for developing land, etc.

They also provide financial assistance for animal

husbandry, dairy farming, sheep breeding, poultry
farming, pisciculture and horticulture. The small and
marginal farmers and landless agricultural workers,
artisans and petty shopkeepers in rural areas are provided
financial assistance through the regional rural banks in
India. These regional rural banks operate under a
commercial bank. Thus the commercial banks meet the
credit requirements of all types of rural people.

5. Financing Consumer Activities:

People in underdeveloped countries being poor and
having low incomes do not possess sufficient financial
resources to buy durable consumer goods. The
commercial banks advance loans to consumers for the
purchase of such items as houses, scooters, fans,
refrigerators, etc. In this way, they also help in raising the
standard of living of the people in developing countries
by providing loans for consumptive activities.

6. Financing Employment Generating

Activities:
The commercial banks finance employment generating
activities in developing countries. They provide loans for
the education of young persons studying in engineering,
medical and other vocational institutes of higher learning.
They advance loans to young entrepreneurs, medical and
engineering graduates, and other technically trained
persons in establishing their own business. Such loan
facilities are being provided by a number of commercial
banks in India. Thus the banks not only help inhuman
capital formation but also in increasing entrepreneurial
activities in developing countries.

7. Help in Monetary Policy:

The commercial banks help the economic development of
a country by faithfully following the monetary policy of
the central bank. In fact, the central bank depends upon
the commercial banks for the success of its policy of
monetary management in keeping with requirements of a
developing economy.

Thus the commercial banks contribute much to the growth

of a developing economy by granting loans to agriculture,
trade and industry, by helping in physical and human
capital formation and by following the monetary policy of
the country.

Balance Sheet of a Commercial

Bank
Liabilities Assets

a. Share Capital a. i. Cash in Hand

b. Reserve ii. Cash with the Central

Funds Bank (RBI)

c. Deposits iii. Cash with the other

banks

i. Fixed b. Money at short

Deposits

ii. Saving c. Bills and securities

Deposits discounted

iii.Current d. Investment of bank

Deposits

iv. Other e. Loans and Advances

Deposits given

d. Borrowings f. Other Assets

e. Other
liabilities