COMMERCIAL BANKING

Chapter 3
Evolution & Origin of Banking
 The word bank is used in the sense of a commercial
bank.
 The word bank has a German origin though some
people believe that it has come from a French word
‘Banqui’ and yet others believe that it has come from
the Italian word ‘Banca’. Whatever it is, it referred to
a bench for keeping , lending and exchanging of
money or coins in the market place by money lenders
and money changers.
 There was no such word as banking before 1640,
although the practice of safe keeping and savings
flourished in the temples of Babylon as early as 2000
BC.
 In India also reference of banking system could be
found in the ancient Jain Temples and literary works
like that of Chanakya etc.
 The first bank called the ‘Bank of Venice’ was established in Venice,
Italy in 1157 to finance the monarch in this wars.
 The bankers of Lombardy were famous in England, but modern
banking began with the English Goldsmiths only after 1640.
 The First Bank in India was Bank of Hindustan started in 1770 by
Alexender and Co.
 But the first bank in modern sense was established in the Bengal
Presidency as the Bank of Bengal in 1806.

 It was merchant bankers who first evolved the system of banking by

trading in commodities than in money. Their trading activities required
the remittance of money from one place to another. For this they
issued ‘hundis’ to remit funds. In India such merchants were known as
‘SETHS’
 The next stage in the growth of banking was the ‘goldsmith’ His
business was such that he had to take special precaution against theft
of gold and jewelry and if he seemed to be an honest person
merchants and neighbours started leaving their bullion, money and
ornaments in his care. As this practice spread the goldsmiths started
charging something. As an evidence for receiving valuables he issued a
receipt – these acted like cheques and were used as a medium of
exchange. The GSm also lending money (Coins of G& Silver) as not all
of them were demanded back at the same time.
Meaning of Bank
A Bank is an institution which accepts deposits
from the public and in turn advances loans by
creating credit. It is different from other financial
institutions in that they cannot create credit
though they may be accepting deposits and
making advances.
 Commercial Banks: Are those banks which
perform all kinds of banking functions such as
accepting deposits, advancing loans, credit
creation and agency functions. They are also
called joint stock banks because they are
organised in the same manner as JSCs.
Role of Commercial Banks in a
Developing Country
Mobilizing Saving for Capital Formation
Financing Industry
Financing Trade
Financing Agriculture
Financing Consumer Activities
Financing Employment Generating
Activities.
Help in monetary Policy
 Two
Essential
Functions
Functions of Commercial Banks Borrowing &
Lending
AcceptingDeposits (Savings, Current and Fixed Dep.)
Advancing Loans (1.Cash Credit – bank advances loans to
businessmen against certain specified securities. The amount of loan is
credited to the current account of the borrower, and the borrower can
withdraw money through cheques., 2.Call loans – These are very short
term loans advanced to the bill brokers for not more than 15 days. They
are advanced against first class bill or securities. Such loans can be
recalled in very short notice. 3.Overdraft – A bank often permits a
business man to draw cheques for a sum greater than the balance lying in
his current account. 4. Discounting BOE – If a creditor holding a BOE
wants money immediately, the bank provides him the money by
discounting the BOE…)
Credit Creation ( Credit creation is one of the most important
functions of commercial banks. Like other business organisations they also
aim at earning profit, for this they accepts deposits and advance loans by
keeping a small cash in reserve for day to day transactions. When a bank
advances a loan, it opens an account in the name of the customer and
does not pay him in cash but allows him to draw the money by cheque
according to his needs. Thus by granting a loan the bank creates credit of
deposit.)
Financing Foreign Trade : by accepting
foreign bills of payment
Agency Services
Miscellaneous Services