INDIAN FINANCIAL SYSTEM

CIA 3

PRESENTATION ON FINANCIAL
INSTITUTIONS- COMMERCIAL BANKS

Submitted by: Submitted to:

2023113 Griyansh Khurana Prof. Bidisha Sarkar
2023130 Nischay Dogra
2023141 Tinu Choudhary
2023167 Rhea Maloo
2023175 Sonal Patwary
3 BBAH B
What is a commercial bank?

A commercial bank is a financial institution that accepts public deposits and provides loans
for consumption and profit-making investment. To distinguish it from a retail bank and an
investment bank, it can also refer to a bank, or a section of a big bank, that deals with
companies or large/middle-sized businesses. Private and public sector banks are examples of
commercial banks.

History

In India, banking is the cornerstone of the country's economic progress. With the growth of
technology and consideration of people's demands, major changes in the banking system and
administration have been noticed over the years.

Phase 1: The Pre-Independence Phase

Before India's independence, there were about 600 banks in the country. In 1770, the Bank of
Hindustan was created in Calcutta for the first time. It was decommissioned in 1832. In the
history of Indian banking, the Oudh Commercial Bank was the country's first commercial
bank. A few other 19th-century banks, such as Allahabad Bank (founded in 1865) and Punjab
National Bank (founded in 1894), have survived the test of time and continue to exist today.
Other banks founded in the early to mid-1800s, such as the Bank of Bengal, Bank of Madras,
and Bank of Bombay, were consolidated to form the Imperial Bank, which subsequently
became the State Bank of India.

Phase 2: The Post-Independence Phase

Following independence, India's financial system evolved in much the same way as it had
before. Under the Banking Regulation Act of 1949, the Indian government chose to
nationalise banks in 1969. The Reserve Bank of India was one of the 14 banks nationalised
(RBI). The Indian government recognised in 1975 that some groups were financially
disadvantaged. In response to the expansion of financial services in India, it established
banking institutions with specialised functions between 1982 and 1990.

NABARD was established in 1982 to boost agricultural activity.

EXIM (Export-Import Bank) was established in 1982 to boost export and import.
To finance housing projects, the National Housing Board was established.

Phase 3: The LPG Era (1991 Till Date)

The Indian economy underwent a significant transformation beginning in 1991. Private

investors were invited to invest in India by the government. The Reserve Bank of India has
approved ten private banks. HDFC, Axis Bank, ICICI, DCB, and IndusInd Bank are just a
few of the notable names that have sprung up as a result of the liberalisation. Two other
banks, Kotak Mahindra Bank (2001) and Yes Bank (2004), were granted licences in the early
to mid-2000s. In 2013-14, IDFC and Bandhan banks were also granted licences.

Role

Commercial banks' main function is to provide financial services to the general public and
businesses, maintaining economic and social stability as well as long-term economic
progress. Credit creation is the most important duty of commercial banks in this regard. They
do not provide the borrower cash when they approve a loan for them. Instead, they open a
deposit account for the borrower, from which he or she can withdraw funds. In other words,
they automatically establish deposits when they approve a loan.

Commercial banks accept a variety of deposits from the general public, particularly from
their customers, such as savings account deposits, recurring account deposits, and fixed
deposits. These deposits are refunded when the buyer requests it or after a set length of time
has passed. Commercial banks offer a variety of loans and advances, including overdrafts,
cash credit, bill discounting, money at call, and so on. They also provide demand and term
loans to a wide range of consumers in exchange for adequate collateral. They also serve as
trustees for their customers' wills and other assets. On the basis of credit and payment
intermediary, the function of credit creation is generated.

Regulations

The Reserve Bank of India Act 1934 (RBI Act) and the Banking Regulation Act 1949 govern
the Indian banking sector (BR Act). The Reserve Bank of India (RBI), India's central bank,
regulates the banking sector by issuing various guidelines, notifications, and regulations from
time to time.

Features

Commercial banks have the following characteristics:

i. Commercial banks deal with money, collect deposits, and provide traders with short-term
loans.

ii. Its major goal is to make money and establish demand deposits, which are used as a form
of exchange.

Nature

Commercial banks are businesses that specialise in certain types of financial activities. Its
dual function is to collect deposits from members of the public and to make advances to
needy and deserving members of society. When banks receive deposits, their obligations
grow, and they become debtors; yet, when they make advances, their assets grow, and they
become creditors. Socially and legally, banking transactions are acceptable. It is in charge of
keeping track of the funds in its account holders' accounts.

The financial services and goods market is a global phenomenon. Because of protectionist
financial regulations, restrictions on banking operations, and an unfavourable financial
climate, international banking has been limited to Euro currency and off-shore banking
centres.

Banking can be defined as the commercial activity of accepting and safeguarding money
owned by other people and companies, and then lending it out for profit. The majority of
people do their banking with a commercial bank. Commercial banks profit through the sale of
mortgages, business loans, vehicle loans, and personal loans, as well as the interest earned on
those loans. Deposits from customers provide banks with the funds they need to make these
loans.

Commercial banks have typically been housed in buildings where consumers can utilise teller
windows and automated teller machines (ATMs) to conduct ordinary banking transactions.
Much banks now allow their customers to undertake most of the same services online that
they could do in person, such as transfers, deposits, and bill payments, thanks to advances in
technology.

Functions

Commercial banks' functions can be divided into two categories.

(a) Basic functions

Deposits are accepted at the bank in the form of savings, current, and fixed deposits. Surplus
funds received from businesses and people are lent to meet the short-term needs of
commercial operations.

Another important duty of this bank is to provide loans and advances to entrepreneurs and
business persons, as well as collect interest. It is the most important source of earnings for
any bank.

A bank keeps a small amount of deposits as a reserve and gives (lends) the rest to borrowers
through demand loans, overdrafts, cash credit, short-term loans, and other types of loans.

Credit cash: When a customer is given credit or a loan, he or she is not given liquid cash. The
customer's bank account is opened first, and then the funds are sent to the account. The bank
is able to manufacture money through this technique.

Secondary functions (b)

Bills of exchange that have been discounted: It is a written agreement that specifies the
amount of money to be paid in exchange for products purchased at a future date.

A commercial bank's discounting strategy can also be used to clear the payment before the
quoted period.

Overdraft facility: This is a loan offered to a customer in exchange for keeping their current
account open and allowing them to overdraw up to a certain limit.

Purchasing and selling securities: The bank provides you with the option of buying and
selling securities.

Customers can use a bank's locker facilities to store their valuables or papers discreetly. This
service is charged at least once a year by the banks.

It uses various tools such as a promissory note, cheques, and bills of exchange to pay and
collect credit.

Commercial Bank Credit Creation

In the simplest sense, credit creation distinguishes a bank from other financial institutions.
The expansion of deposits is referred to as credit creation. Furthermore, because demand
deposits serve as a primary means of exchange, banks can increase their demand deposits to
multiples of their cash holdings.
Demand deposits are an extremely important part of the money supply. The expansion of
demand deposits corresponds to an increase in the money supply. Credit underpins the whole
banking system. The definition of credit is to obtain purchasing power today while promising
to pay at a later date. And by bank credit, we mean both bank loans and advances. A bank
holds a portion of its deposits as a minimum reserve to meet depositor demands, while the
rest is lent out to earn money. The loan is delivered to the browser's account. Every bank
creates a corresponding deposit in the bank. As a result, credit creation entails increasing
bank deposits.

Application of commercial banks

Commercial banks are financial institutes which provide financial services to general public
such as accepting deposit, lending money and ensuring economic stability.

1) Accepting Deposit- The main role of commercial bank is to accept deposit, it accepts
deposit in form of saving, current and fixed deposits. It collects funds from the
general public, business sector and lends money when in need. The main idea is to
mobilize fund of public for savings. Hence, deposits are lifeline of commercial bank.

2) Credit: Another major role of commercial bank is finance business households,

entrepreneurs and general public. It is one of the main source of income for banks. A
bank keeps a certain portion of fund (deposits) with itself as reserve and lends out the
rest. The difference between these rates is the earning of bank. For example: A bank
may offer savings interest rate at 8% whereas it may charge 12% for loan. So the
difference, 4% is the earning of bank.

3) Economic stability: Commercial banks help in creation of capital and ensure liquidity
in the market. It plays vital role in the economic development of a country. They
ensure liquidity through collection of money from public in form of savings and
giving out loan which in-turn helps in increasing production, employment, consumer
spending thus boosting the economy. Commercial banks are strictly under the control
of central bank which states the reserve requirements, decides the rates and controls
these banks. In the words of Wick-sell, “Bank is the heart and central point of modern
exchange economy.”. In case of India; Reserve Bank of India (RBI) is the central
agency.
4) Finance to Government: In any Country government is the central authority which
looks over other industry and supports them when needed. Commercial banks provide
long term credit to government by investing in their bonds or other securities. They
also buy treasury bills issued by the government as a form of investment though the
government may look to sell such securities in order to control the money supply in
market.

Practical usage of commercial banks

Apart from the various application of commercial banks. There are various practical
usages too:

1) Credit and Debit Cards: A credit card is one which enables the cardholder to borrow
fund from the bank against a line of credit. One can make payments using the card
which are then reflected on the bill, the bank pays merchant and then later one can
pay the bank. One has to pay interest on their purchase which can be avoided by
repaying the amount time to time. The interest for credit cards are generally higher.
There are various categories of credit cards. Credit card users can reap cash, get credit
points, avail better discounts and secure travel point by regular use of credit card.
Whereas, in case of Debit cards the bank deducts money when the card is in use. They
too are used to make payments; can be used to withdraw instant cash from ATM.
Here the amount that can be spent is limited to account size of the holder. They don’t
cost extra and there are no annual fee or charges for them.

2) Online Banking: In the modern times, online payment or banking has evolved and
played a vital role in the banking sector. One can transfer funds instantly, buy grocery
from next door shop and make payment simply through the use of internet. This helps
the general public as one doesn’t have to make frequent trips to bank to withdraw
cash, carry large amount of money and barging for change. Payments or fund transfer
can also take place internationally without any restrictions within few minutes. One
benefit of online banking that everyone gets to avail is the amount of cash that can be
redeemed back and heavy discounts. The fact that transactions can be made 24*7 with
proper track of transactions makes it more convenient.

3) Discounting Bill of Exchange: It is a promissory document made to pay a specific

amount of money at a fix time period. It can be enchased earlier through discounting
 process of commercial bank. Alternatively, a bill of exchange is a document
acknowledging an amount of money owed in consideration of goods received. 

4) Overdraft Facility: It is the excess amount provided by a bank allowing a customer to

withdraw more than the amount in his/her account. The security for overdraft is
generally is assets such as shares, debentures, life insurance etc.

5) Investments: Banks utilize the mobilized funds by lending and investing them in
various sector of economy. The not only help in capital formation but also channelize
the funds into productive investments. The pooled savings collect by the bank should
be distributed into various sectors of economy for better economic development.

Examples and application

Providing Loans to the General Public:-

Granting Loans to the people is one of the most important functions of commercial
banks.Borrowers pay interest to banks, which is their primary source of revenue.Banks make
loans not just on the basis of public deposits, but also on the basis of money deposited in
borrowers' accounts. To put it another way, they make loans from deposits and deposits from
loans. This is referred to as commercial bank credit generation.

Recently, one of the group member’s family rought a car therefore took a loan for the same.
There some requirements upon which they were provided loan as per our need. First of all
they checked the Cibil Score whether they had a good cibil score or not. It is preferred to
have a cibil score of 750+ to get loan on easy grounds or else they put a lot more conditions
to be fulfilled for granting loan. Secondly they checked previous three years Income Tax
Return filing. In our case the ITR was properly filed for all the three years but if there is any
malpractice involved in the filing of ITR than the grounds become difficult on which they
grant loan.

Thirdly they ensure whether the person is able to repay the instalment on time or not for this
they analyse the annual earnings of the person and a proper income to instalment comparison
is made and it is made sure that whether the person has ability to repay the whole amount or
not.

The bank requires a guarantor who promises to pay the borrower’s debt in the event that the
borrower defaults on their loan obligation.
After all this there is some paper work with all the guidelines of the loans duly signed by the
borrower and hence the loan is granted to the person. When the commodity which is
purchased in our case it was a car, in on hire purchase which means that the products are
delivered to the buyer at the time of the Hire Purchase Agreement, but the buyer does not
become the owner of the goods until the last instalment is paid. Until the last instalment is
paid off, all payments are classified as hire.

In this way they were granted our Car Loan.

Locker Facility:

Banks provides a provision of locker service with them.Bank’s locker service provides
customers with a completely secure place for storing their valuable things, confidential
documents, and other valuables in the event of an unexpected incidence. The size of the
locker can be customised based on your needs and the cost of the locker. To avail this service
bank keeps a security deposit in the form of F.D. on which it provides interest at the
prevailing rate.

An agreement is signed by the locker holder and the bank regarding the terms and condition
with respect to availing this service. An AMC (Annual Maintenance Charges) is made by the
bank.. The bank locker is operated by two keys, one of which is retained by the bank and the
other of which is supplied to you. To open the locker and gain access to your belongings,
you'll need both keys.

At the time when you don’t want to continue the locker service than the bank gives you back
the items that were kept in the locker and provide you with the F.D. amount that is
accumulated from the time you were availing this service.

Deposition of money at the bank:

Money is placed in banking organisations for safekeeping and is referred to as a bank deposit.
These funds are deposited into deposit accounts such as savings, checking, and money market
accounts. According to the terms and conditions of the account agreement, the account holder
has the right to withdraw deposited funds.

We generally visit to bank for depositing cash in the bank account so it’s a quite simple
process and takes hardly 5 minutes to deposit money in the account. All we have to do is
request a deposit slip and fill in all of the necessary information, including the date, account,
type, account number, account holder's name, and amount, before signing the deposit slip.

Remember to fill out the entire receipt that comes with the deposit slip. If you're making a
cash deposit, fill in the denominations in the denomination column. If the deposit is made by
check, provide the bank information, such as the name of the bank, the cheque number, the
date, and so on.

Give the deposit slip, as well as the cash or check, to the person in charge at the bank.
Remember to keep the receipt, which is also known as the counterfoil.

In this way the money gets deposited in the bank account.

NEFT

Funds are transferred to a credit account with the opposite party utilising the RBI's NEFT
service. RBI acts as a service provider, transferring credit to the account of the other bank.
NEFT uses a deferred net settlement (DNS) system, which means transactions are settled in
batches. The settlement or transactions in DNS take place only at a specific point in time.
Original cancelled cheque leaf with pre-printed account holder name, account number and
IFSC code are the required information. With No amount limit the processing charges range
from 5INR to 25INR depending upon the amount of transfer.The NEFT procedure is broken
down into the following steps:

 Data Entry at the Sending Bank Branch in response to a NEFT request from a bank
customer.
 At the Sending NEFT Service Centre, data is processed or uploaded.
 NEFT message transmission or submission to the NEFT centre.
 NEFT message processing and transmission to beneficiary banks. Validation of data
at the receiving NEFT Service Center.
 Payment to the intended recipient.

NEFT was recently used as a safe option of fund transfer, for transferring the First and
Second year fees by most of the students.

Cash Withdrawal

In the ATM machine, place your ATM card in the slot indicated in the diagram above.
Choose your language from the drop-down menus on the display screen. Enter your 4-digit
secret ATM Pin Number on the keypad. You'll find many types of transaction options for
cash withdrawal on the ATM screen; select the Withdrawal Option. Following your selection
of the cash withdrawal option, the screen will present various account types for you to choose
from. Now, type in the amount you want to withdraw and hit enter. Take the money from the
machine's lower slot. After you collect the cash, you will be given the choice of printing
whatever you wish as a transaction receipt. If you want a printed receipt, select yes and end
the transaction.

Just like depositing, withdrawal is a regular process and one needs to visit the bank or ATMs
regularly for carrying out transactions.

Making Fixed Deposits –

 Download the application form on the bank's website if you already have a savings
account with them.
 Fill out the form with the appropriate duration and amount.
 Fill out the application form and submit it to the bank's branch.
 Some banks may require you to provide information on your nominee, so make sure
you have proper information.
 Make sure you have sufficient funds in your account to cover the FD payment.
 If you choose not to download the form before visiting the bank, you can request one
from the branch's workers.

FD is used as a safe investment option to ensure regular returns and is mostly used by
population who either wants to be risk averse or wants a secure investment with low risk. We
have been to banks with elders to open a FD account.

References

1. Commercial bank – Wikipedia: https://en.wikipedia.org/wiki/Commercial_bank

2. Functions of commercial banks:
https://magadhuniversity.ac.in/download/econtent/pdf/LECTURE%2042.pdf
3. Understanding commercial Banks:
https://www.investopedia.com/terms/c/commercialbank.asp
4. Commercial Bank:
https://corporatefinanceinstitute.com/resources/knowledge/finance/commercial-bank/