Commercial Banks

Unit 2

Introduction

Banks play a very useful and dynamic role in the economic life of every modern
economy.

Commercial banks are the institutions for accepting deposits from public and lending
money to individuals as well as business organisations.

Commercial banks are registered under the Indian Companies Act, 1956 and governed
by the Indian Banking Regulation Act, 1949.

Commercial banks in India has undergone major changes during post-independence

period.

In the past, commercial banks were prepared to take only limited risks and function
with limited responsibilities. From the days of such limited operations, commercial
banks have emerged into the era of conventional and developmental banking.

Functions of Commercial Banks

1.

Acceptance of deposits

. Fixed

deposits

. Saving

bank deposits

. Current

account deposits

. Recurring

2.

deposits

Lending of Money

. Loans

to business and trade

. Loans

to industry

. Loans

to agriculture and allied activities

. Exports
. Cash

and imports trade

credit

. Overdraft

Facility

. Discounting

Bills of Exchange

3.

Credit Creation

4.

Agency Function

Collection of cheques, Payments for bills, Sale and purchase of securities,

Trustee, executor and attorney, Dividend on Shares

5.

Helping International Trade (Purchase & Sale of Foreign Exchange)

6.

Supporting Economic Development

7.

General Functions

Letters of credits, Draft facilities, travellers cheques, Underwriting, Guarantee

for deferred payments, Locker facility, Business and statistical information

Important tools of modern banking are Automatic Telling Machine (ATM), Real Time Gross
Settlement (RTGS) and the National Electronic Funds Transfer (NEFT).

An automated or automatic teller machine (ATM) also known as an automated banking

machine (ABM)

India has two main electronic funds settlement systems for one to one transactions: the
Real Time Gross Settlement (RTGS) and the National Electronic Funds Transfer (NEFT)
systems.

Real Time Gross Settlement (RTGS): RTGS system is a funds transfer mechanism where
transfer of money takes place from one bank to another on a real time and on gross
basis. This is the fastest possible money transfer system through the banking channel.

Indian Financial System Code (IFSC) for RTGS and NEFT purposes. This is an eleven digit
alphanumeric code and unique to each branch of bank.

The first four letters indicate the identity of the bank and remaining seven numerals
indicate a single branch. This code is provided on the cheque books, which are required
for transactions along with recipients account number.

National Electronic Fund Transfer (NEFT): The National Electronic Fund Transfer (NEFT)
system is a nation-wide system that facilitates individuals, firms and corporates to
electronically transfer funds from any bank branch to any individual, firm or corporate
having an account with any other bank branch in the country.

Credit Creation

Credit creation is the most important function of banking system in the country. It can
be defined as the process through which the commercial banks in the country jointly
create the flow of money in the economic system.

Commercial banks create loans by giving loans. When a bank gives loan to someone
it opens an account against the name of the borrower who can withdraw money from
bank issuing cheques.

When a commercial bank holds reserves over and above the statutory minimum, then,
it is called as excess reserves. These excess reserves come to bank through cash
deposits of public through which banks create credit.

Commercial banks create credit by accepting deposits and advancing loans.

Banks are the financial institutions dealing in money. They accept deposits at lower
rate of interest anf lend that money to the needy parties at a higher rate of profit.

Primary Deposits: These are the deposits which the depositors put with the banks.
Depositor is the creditor of the bank and bank is the debtor of the depositor.

Against primary deposits there are primary issues that are the claims issued by deficit
spenders directly to surplus spenders.

Secondary Deposits: These are the deposits which arise on account of loans by the
banks to the people.

Financial sector issue secondary claims on themselves to purchase the primary claims

The supply of money is directly altered by a change in bank deposits.

Limitations of Credit Creation

Demand for Credit

Amount of cash

Central Banks Monetary Policy

External Drain

Banking habits, Banking System and collateral security

Commercial Banks in India

At the time of Independence, India had a fairly well-developed banking system with more
than 645 Banks having more than 4800 branch offices. These banks although developed
but they could not conform to social needs of the society.

These banks generally catered to the needs of industries and that too big ones. Other
priority sectors like agriculture, small-scale industries, exports etc., were almost
neglected.

To overcome these deficiencies, 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).

Commercial banks in India include Scheduled banks(banks which have been included in
the Second Schedule of RBI Act 1934)

List of Nationalised Banks

1. Allahabad Bank
2. Andhra Bank
3. Bank of Baroda
4. Bank of India
5. Bank of Maharashtra
6. Canara Bank
7. Central Bank of India
8. Corporation Bank
9. Dena Bank
10. Indian Bank
11. Indian Overseas Bank
12. Oriental Bank of Commerce
13. Punjab and Sind Bank
14. Punjab National Bank
15. Syndicate Bank
16. UCO Bank
17. Union Bank of India
18. United Bank of India
19. Vijaya Bank

Nationalisation of Commercial Banks: Causes

Concentration of Credit

Urban bias

Neglect of Agriculture Sector

Misuse of funds and illegal activities

Neglect of Priority Sector

Objectives of Nationalisation

Removal of control by a few

To mobilise savings and channelize them for productive purposes in accordance with
plans and priorities

To provide adequate credit for agriculture, small industry and export

To help in the most effective development of national resources so that the

objectives of the Govt. could be realised with a greater degree of assurance.

To give a professional bent to management.

To create fresh opportunities for neglected and backward areas new class of small
entrepreneurs.

To provide adequate training as well as terms of services for bank staff.

As a whole to bring about right atmosphere for the development in the money
market.

Evaluation of performance after

nationalisation

Deposit Mobilisation

Year

Amount

June 1969

` 4650 Crores

All Nationalised Banks

2001

` 9,58,000 Crores

All Scheduled Banks

Dec. 2006

` 23,50,000 Crores

50% of National Income

2008

` 31,97,000 Crores

80% of National Income

Dec. 2014

` 79,30,000 Crores

Credit Expansion: Total credit has increased largely to the neglected sectors
such as agriculture, SSIs, road and transport operators, retail trade, small
businesses and self employed.
Year

Amount

June 1969

` 3399 Crores

June 2006

` 10,93,000 Crores

June 2008

` 23,62,000 Crores

April 2014

` 60,00,000 Crores

March 2014

Bank lending for SSI have gone up to 36%

Branch opening in rural and unbanked areas: In 1969, there was just 22% bank
offices in rural areas which has improve to 38% in June 2013.

Lead Bank Scheme: Under this scheme, all the districts of the country are
allotted to some new bank or the other. One such bank in any district helps its
development by opening new branches and by providing maximum credit
facilities.

Branch Expansion: In post nationalisation period, there has been a rapid

expansion of bank branches, mostly in rural areas.
Year

No. of Branches

Population per Branch

June 1969

8262 branches

65,000 people

2006

69,616 branches

16,000 people

2008

76,885 branches

15,000 people

2013

1,11,723 branches

12,000 people

Failure

Most of the rural branches are running at a loss due to high overheads and prevalence of
barter system in rural India.

Although the commercial banks have spread their wings to every corner of the country,
but considering the huge population of India, their growth in numerical terms in
insufficient. This is specially so with regard to rural areas who have just 38 per cent
of the bank branches but where more than 70 per cent of the population of the
country reside.

There are regional imbalances in the coverage of bank offices. Only few states have well
developed banking facilities : Arunachal Pradesh, Jammu and Kashmir, Uttaranchal,
Manipur, Tripura on an average have lesser number of banks compared to other states.

Bad and doubtful debts of scheduled commercial banks, called non-performing assets
(NPAs) have swelled over a period of time. Gross NPAs as a percentage of Gross Advances
were more than 10 percent till 2001-02, but due to stringent credit norms and improved
financial health of the economy the gross NPAs have fallen. As a percentage of gross
advances, they have fallen from 10.5 per cent in 2001-02 to 3.6 per cent in 2012-13.

The absolute profits of the banks are rising but the profitability ratio (in terms of return
on investment, return on equity) has not improved much. Six factors have been
identified for declining trends in profitability. These are

(i)

lower interest on Government borrowings from banks

(ii)

subsidisation of credit to priority sector

(iii)

rapid branch expansion

(iv)

locking up of funds in low-term low yielding securities resulting from directed credit
programmes of banks

(v)

lack of competition

(vi)

Increasing expenditure resulting from over staffing and mushrooming of branches some
of which are non-viable

.. The
.. In

growth of advances to the priority sector is slow.

relation to deposit mobilisation, commercial banks are facing challenges from NBFI
such as mutual funds, insurance companies and leasing & investment companies.

Major weakness of nationalised bank is its failure to sustain the desired credit pattern
and fill in credit gaps in different sectors.

The post nationalisation period has witnessed a widening gap between promise and
performance.

THANK