Commercial Banks

Commercial banks are the oldest, biggest and fastest growing financial intermediaries They are important depositories of public saving and most important disburser of finance.

Management of Reserve
Creation of Credit

The Creation of Money

Banks Credit creation depends on the excess reserves. Excess reserves = actual reserves required reserves. If reserves required ratio is 10%, banks can create a loan of 9000 on 1000 deposits. The total money supply in the economy is 10000.

Process of credit creation

Bank position deposits loans reserves -------------------------------------------------------------------------------------------Original bank 1000 900 100 2nd bank 900 810 90 3d bank 810 729 81 4th Bank 729 656 72.9 5th Bank 656 590.49 65.61 6th Bank 590.49 531.44 59.05 7th Bank 531.44 478.30 53.14 8th Bank 478.30 430.47 47.80 9th Bank 430.47 387.42 43.05 10th Bank 387.42 348.68 38.04 _____________________________________________________
Sum 10,000 9,000 1,000

Origin of commercial bank can be traced back in vedic period( use of hundi)

Middle of 19th century

First bank (1770)

Indigenous banking
Bank of Hindustan

Later we had Presidency Bank in Calcutta Bombay & Madras

1919

Imperial Bank of India

Growth and Structure of commercial bank

Importance of Indian commercial Banks in National Economy Year Deposit/N.I. Deposit / Saving Share in financial asset

1951-56 1960-61 1975-76 1980-81 1990-91 1994-95 1995-96 2001-02

10 13 24 35.9 48.1 52 44.82 61.5

16.6 14.2 41.8 45.8 31.8 40.2 28.2 37.83

73.8 65.5 64.8 64.7 72.2

Indian Banking system RBI

Schedule Banks

Non Scheduled Bank

State Coop.
Banks

Commercial Bank
Indian Foreign

Central Coop. bank Bank and Primary Credit Societies

Commercial Bank

PSU Banks

Pvt. Sector Bank

SBI & its subsidaries

Other nationalized bank

Regional rural bank

Apart from usual function, foreign bank are now playing a special role in shaping the attitude ,perceptions and policies of foreign government, corporate, and other clients towards India (a)Structuring and syndicating project finance for crucial sector (b)Advising and introducing overseas companies in joint venture and collaboration with Indian Companies Helping to bring the FII and Indian companies (d) Managing and syndicating the euro issue of debt and equity (e) Introducing new technology in data management and information system

The Indian Banks include 27 PSU banks ,196 RRB,30 private sector bank and 44 Foreign banks in 2001-02

Liabilities of Banks Demand deposit

Current deposit

Call deposit Term deposit

Banking Assets
Investment: 1.Cash in hand and balance with RBI 2.Asset with banking system 3.Investment in government and other approved securities 4.Bank credit among these assets, and is influence by the RBI policy, quantitatively, bank credit and investment in government securities.

Commercial Banks Investment

Govt. of India securities Other approved Securities Non approved securities

Factor affecting Composition of Bank Deposit

Increase in National Income Expansion of banking facilities in new area & for new class of people Increase in banking habit Increase in relative rate of return Increase in deficit financing Increase in bank credit Inflow of deposit by NRIs Growth in substitutes

Banking Innovations
I) Retail Banking II) Bank as authorized dealer III) Customer service IV) Lead Bank scheme V) Service area approach VI) Action plans VII)Micro finance VIII)Banking Advisory services IX) Participation Certificate and inter bank deposit X) Consortium approach XI) Credit cards XII)New technology in Banking XIII)Local Area Banks XIV)Asset Liability Management XV)Other diversification in Banking