4.

COMMERCIAL BANKS IN INDIA

INTRODUCTION :-
Commercial banks are cornerstore institution in the financial system, playing a vital role in
promoting economic activity and ensuring financial stability. These banks provide a
comprehensive range of financial services, catering to the needs of individuals, businesses
and governments alike.

DEFINITION OF COMMERCIAL BANKS

ACCORDING TO CROWTHER,”A commercial bank is an institution which collects money
from those who have it to spare, or who are saving it out of their income and lends this
money out to those who require it.”

According to Culbertson, “Commercial banks are the institutions that make short term
loans to business and in the process create money.”

MEANING OF COMMERCIAL BANKS

A Commercial Bank is a financial institution which performs the functions of
accepting deposits from the general public and giving loans for investment with the aim of
earning profit.

A commercial Bank is a type of financial institution that accepts deposit, offers checking
account services, makes various loans, and offers basic financial products like certificates
of deposits and savings accounts to individuals and small businesses.

OBJECTIVES OF COMMERCIAL BANKS

• PROFIT MAXIMIZATION AND ECONOMIC ACTIVITY: like any other business entity,
a commercial banks primary objective is to maximize profits. This is essential for its
survival, growth, and ability to pay dividends to its shareholders will stop profitability
allows the bank to expand its services, invest in technology, and enhance its
competitive edge.
• SAVINGS MOBILIZATION AND LENDING: commercial banks attract deposits from
the public, often offering a lower rate of interest on these savings. This mobilization
of funds helps in pooling resources that would otherwise remain idle.
• ENCOURAGING SAVINGS: by offering radius deposits kids, banks encourage
individuals to save money regularly. This behavior is crucial for personal financial
stability and for the economy, as savings provide the capital necessary for
investments.
 • MOTIVATING INVESTMENT: banks offer a range of financial products, such as fixed
deposits, mutual funds and bonds, which encourage people to invest their savings .
these investments can lead to wealth accumulation and financial independence.
• MONEY CREATION: when banks lend money, they do not necessarily use their own
capital instead, they create new money through the process of credit creation. This
increases the overall money supply in the economy, which is essential for economic
growth.
• CAPITAL FORMATION: banks play a critical role in capital formation by
transforming savings into investment. This accumulation of capital is essential for
funding new projects, expanding businesses, and driving technological
advancements.
• INVESTMENT FACILITATION: banks provide businesses within necessary capital to
invest in new venture, expand operations, or upgrade technology. This support is
crucial for economic development and job creation.
• CUSTOMER SERVICE: how much should a bank sulfide or would I be of service,
including loans, deposits, wealth management, and financial advice. These services
are tailored to meet the diverse needs of individuals and businesses, helping them
achieve their financial goals.
• ECONOMIC STABILITY: by regulating the amount of money they lend and interest
rates they charge, banks play a role in controlling inflation and ensuring economic
stability.
• GOVERNMENT COOPERATION: banks often work closely with governments,
providing data, analysis, and advise on economic issues. This corporation helps in
the formulation of policies that can promote economic stability, growth, and
development.
• SUPPORT FOR TRADE AND DEVELOPMENT: banks provide essential services like
letters of credit, calling exchange, and create finance, which facilitate international
and domestic training. These services are vital for businesses engaged in importing
and exporting goods and services.

CHARACTERISTICS OF COMMERCIAL BANKS

1. Deposit acceptance: commercial banks accept deposits from the public,
providing them with a safe place to store their money. These deposits can be
in the form of savings accounts,current accounts, recurring deposits or fixed
deposits.
 2. Loan provision: they provide loans to individuals, businesses ,and
governments. These loans can be short term or long term and can include
personal loans, business loans,mortgages and credit lines.
3. Payment services: they offer payment and transaction services like issuing
debit and credit cards managing electronic funds transfers, and providing
online banking facilities.
4. Profit oriented: commercial banks aim to make a profit mainly through the
difference between the interest rates they pay on deposits and the higher
interest rates the charge on loans. The profits they make are used for
business growth, paying dividends, and improving services.
5. Regulated by Central Bank: in most countries, including India, commercial
banks are regulated by the central bank to ensure financial stability and
protect depositors interests.
6. Wealth management: many commercial banks offer wealth management
services, providing personalized financial planning, investment advice and
portfolio management for high net worth individuals.
7. Mutual funds and investment products: commercial banks offer mutual
funds, which are investment options where money from many investors is
pooled together to buy a variety of stocks, bonds, or other assets. This helps
spread out risk and is managed by professional. Besides mutual funds,
banks provide other investment options like fixed deposits stocks and bonds
etc.
8. Currency exchange: commercial banks offer currency exchange services for
travellers and businesses dealing in international trade. They may also
provide foreign currency accounts for individuals and businesses engaged in
cross border transactions.
9. Risk management services: commercial banks offer various risk
management services, including insurance products and derivatives like
optionns nd futures, to help individuals and businesses hedge against
financial risks such as currency fluctuations, interest rate changes, and
market volatility.
10. Financial inclusion initiatives: many commercial banks actively participate
in financial inclusion programs aimed at bringing banking services to
underserved and unbanked populations.

STRUCTURE OF COMMERCIAL BANKING

SCHEDULED BANKS
Scheduled bank refers to a bank that is included in the second schedule of the
reserve Bank of India act, 1934. These banks maintain a cash reserve ratio with RBI. They
are authorized to borrow funds from the reserve Bank of India and their comparatively more
financially stable.
Features of scheduled banks
1. Business of banking in India: a scheduled bank must be engaged in the business of
banking within India, meaning it primarily accepts deposits, lends money and
provides other banking services.
2. Legal structure: the bank must either be a company registered under the
companies act or an institution notified by the Central Government of India.
3. Minimum capital requirement: the bank must have a paid up capital and reserve
of at least 5 lakh. This financial threshold ensures that the bank has a minimum
level of financial stability.
4. Compliance with RBI regulations: the bank must operate in accordance with the
rules and regulations set by the reserve Bank of India. This includes adhering to
guidelines on capital adequacy, risk management, and other prudential norms.
5. Eligibility for RBI support: A scheduled bank is eligible to borrow from the RBI at
the bank rate. this access to Central Bank funds helps the bank maintain liquidity
and manage its financial obligations.
6. Membership of clearing houses: upon becoming a scheduled bank, it
automatically acquires membership in clearing houses, which facilitates the
clearing and settlement of cheques and other payment instruments.
7. Safeguarding depositor’s interests: the activities of the scheduled bank should
not adversely affect the interests of its depositors. This implies that the bank is
expected to operate in a manner that prioritizes the safety and security of depositor
funds.

COMMERCIAL BANKS
Commercial banks act as intermediaries between those who have surplus funds
and those who need funds, facilitating economic activity by ensuring the smooth flow of
money in the economy. Examples: State Bank of India, housing development finance
corporation Bank, industrial credit and investment corporation of India bank, Dena
Bank, etc.

1. Public sector banks: these banks are Owned and controlled by the government.
The main objective of these banks is to provide service to society, not to make
profits. State Bank of India, Bank of India, Punjab National Bank, Canada bank, and
union Bank of India, are some examples of public sector banks.
2. Private sector banks: these Bank are owned and controlled by private
businessmen. Their main objective is to earn profits. ICICI Bank, HDFC Bank,Axis
bank and IDBI Bank are some examples of private sector bank.
 3. Foreign banks: these Bank are owned and controlled by foreign promoters. Their
number has grown rapidly since 1991, when the process of economic liberalization
started in India. Bank of America, American express bank and standard chartered
Bank or examples of foreign banks.
4. Regional rural banks: these are Indian schedule commercial banks operating at
the regional level in different states of India. They have been created with a view of
serving primarily the rural areas of India with basic banking and financial services.
However, RRBs may have branches setup for urban operations and their area of
operation may include urban areas too.

COOPERATIVE BANK
Is an institution established on a cooperative basis and dealing in the ordinary banking
business. Like other banks, cooperative banks are founded by collecting funds through
shares, accepting deposits and grant loans.

Cooperative banks are financial institutions that are owned and operated by their
members who are individuals ,businesses, or other organizations. It is an important source
of rural credit, i.e., agriculture financing in India. Maharashtra State cooperative Bank,
Punjab State cooperative Bank, Saraswat cooperative Bank etc are some of the examples
of cooperative bank.

UNSCHEDULED BANKS
Unscheduled banks are banks that are not listed in the second schedule of the
reserve Bank of India act, 1934. Unscheduled banks do not have to adhere to the same
regulatory framework as scheduled banks.

Features of unscheduled banks:

1. Regulatory status: they are not regulated by the RBI in the same way as scheduled
banks. They do not have to follow the same stringent requirements for reserve ratios
and other regulatory norms.
2. Lack of reserve Bank support: they do not have access to certain benefits that
scheduled banks do, such as access to the RBI’s refinance facilities and other forms
of support.
3. Deposit insurance: they are not covered by deposit insurance from the deposit
insurance and credit guarantee corporation, which means depositors may face
higher risk.
4. Operations: They may not have the same operational flexibility or prestige as
scheduled banks and may not offer the same range of services.
 5. Examples: Bangalore city cooperative Bank limited, Baroda City cooperative bank
limited, Phagwara’s local area Bank limited, Kolhapur’s Subhadra local area Bank
limited and mahbubnagar’s Krishna bhima samruddhi local area Bank .

TYPES OF BANKS
The banking system in India is divided into several types,each serving specific
functions and purposes.

1. Central Bank: The reserve Bank of India serves as the Central Bank of India and is
responsible for regulating and controlling the monitory and banking system in the
country. It issues currency, acts as a banker to the government and commercial
banks, and manages the country’s foreign exchange and gold reserves.
2. Commercial banks: A commercial bank is a financial institution that accepts
deposits from the public and gives loans for consumption and investment to make a
profit, most common types of banks and include public sector banks, private sector
banks and foreign banks. They provide various services like savings and current
acco Public unts, loans, and investments.
a) Private sector banks
b) Public sector banks
c) Regional rural banks
d) Foreign banks
3. Cooperative banks: A cooperative Bank is registered under the cooperative
societies act of 1912 and is run by an elected managing committee. it work on a non
profit, no loss basis and mainly serves entrepreneurs, small businesses, self
employment and more in urban areas.

★ State cooperative Bank: A State cooperative Bank is a federation of the central

cooperative banks that will act as a custodian of the cooperative banking structure in
the state.

★ urban cooperative Bank: The urban cooperative Bank is the primary cooperative
Bank located in urban and semi urban areas. These banks essentially lent to smaller
borrowers, and businesses centred around a community, locality, and more.

4. Payment banks: payment banks are relatively new banking model in the country
that has been conceptualised by the RBI. This bank is allowed to accept a restricted
deposit. This amount is limited to rupees 100000 for a customer. the bank also offer
services such as ATM cards, net banking, and more.
5. Small finance banks: These banks primarily serve the unserved and underserved
sections of the population, including small businesses and low income individuals. This
type of bank is licensed under section 22 of the banking regulation act 1949.

★ AU Small finance Bank limited.

★ Utkarsh Mall finance Bank limited.

★ Fincare small finance Bank limited.

★ Ujjivan small finance Bank limited.

★ Jana small finance Bank limited.

6. Scheduled banks: These banks are listed in the second schedule of the RBI act,
1934. it includes both public and private sector banks that meet RBI’s criteria. These
banks are eligible for loans from the reserve Bank of India at the bank rate, providing
them with a significant advantage in maintaining liquidity.

7. non scheduled banks: non scheduled banks are financial institutions that are not
included in the second schedule of the RBI act, 1934. These banks are generally smaller
in size and have more localized operations compared to scheduled banks. They do not
qualify for the facilities or refinance in support provided by the reserve Bank of India,
making them more vulnerable to liquidity issues.

8. Development banks: development banks are specialized financial institutions that

provide long term capital to support the development of key sectors like industry and
agriculture. Examples: NABARD, SIDBI, IDBI Bank etc.

9. rural regional banks: these banks began operations in 1975 under the regional rural
bank act of 1976. The establishment of 196 occurred between 1987 and 2005. These
banks are owned by the national government to the tune of 50%, the state government
to the tune of 15%, and the commercial bank to the tune of 35%.

10. local area banks: these banks were founded in 1996 and cooperate under the
companies act of 1956. these are profit seeking banks. These are operated by private
companies.

11. Specialized Banks: the specialist banks include the export and import Bank. These
banks fund exports and imports as well as make loans. The “ National bank for
agriculture and rural development” frequently assumes commercial and monetory
responsibility for rural art works, handicrafts ,communities and agricultural
development (NABARD)..
12. Small financing institutions: the country’s national government regulates and
controls it. Responsible for providing financial assistance and loans to small
enterprises and trades such as farming or the impoverished unorganized sector.
Examples: AU small finance Bank, ujjivan small finance Bank, equitas small finance
Bank.

FUNCTIONS OF BANKS :-

1. Primary functions
a) Accepting deposits: the primary function for which Commercial Banks were
established is to accept deposits from the general public, who possess
surplus funds and are willing to deposit them so has to earn interest on it.

★ Savings deposits: the commercial bank accept small deposits from

households or persons in order to encourage savings in the economy.
 ★ current deposits: these accounts do not offer any interest. Further, most
current account offer overdrafts up to a pre specified limit. The bank,
therefore, under takes the obligation of paying all cheques against deposit
subject to the availability of sufficient funds in the account.

★ fixed deposits: a fixed deposit is a popular investment option offered by

banks and financial institutions where a sum of money is deposited for a fixed
period at a predetermined interest rate.

★ recurring deposits: recurring deposit is a type of financial instrument

offered by banks and financial institutions that allows individuals to save a
fixed amount of money regularly, typically monthly, over a specified period. At
the end of the RD term, the account holder receives the invested amount
along with the interest earned.

b) providing loan and advances: when banks provide loans and advances, they .
are offering funds to individuals, businesses, or governments, typically with the
expectation of repayment along with interest. These loans can be short term, medium
term, or long term depending on the needs of the borrower and the nature of the loan.

★ Term loans: term loans are designed for long term financing needs such as
buying property, equipment, or other significant assets. These loans are
prepared over a set period, usually ranging from a few years to several
decates with fixed or variable interest rates. Repayments are made in regular
installments. Businesses might use term loans to find expansions, while
individuals might use them for large purchases like homes.

★ overdraft facility: any overdraft allows customers to withdraw more money

than the currently have in their account, up to a certain limit. They only pay
interest on the amount the overdraw,to manage short term cash flow needs.

★ cash credit: cash credit is a short term borrowing option mainly used by the
businesses to cover their daily operational expenses. It is usually secured by
collateral, like inventory or receivables, allowing businesses to access funds as
needed.

★ discounting bills of exchange: this service allows businesses to get

immediate cash by selling their bills of exchange to a bank before they are
due. The bank provides the cash up front, deducting a small discount fee, and
then collect the full amount from the buyer when the bill matures.

2. Secondary functions

1. Agency functions: agency functions refer to the various services that

banks provide on behalf of their clients or customers, where the bank acts an
intermediary or agent in performing specific tasks. these functions involve
handling transactions, managing investments, and providing administrative
support, based on the clients instructions or needs.

a) transfer of funds: the purpose is to move money from one account to

another on behalf of the client using systems like NEFT, RTGS and IMPS, Banks
facilitate electronic transfer of funds efficiently and securely.

★NEFT ( National electronic funds transfer) : a system used for transferring

money electronically between banks in India. NEFT transactions are processed
in batches and usually take a few hours to complete. It is commonly used for
domestic transfers between accounts.

★ RTGS ( real time grass settlement) : a system for high value transactions
where the money is transferred in real time and on a Gross basis. RTGS is used
for large sums of money that need to be transferred instantly, making it
suitable for urgent payments.

★ IMPS (immediate payment service) : an instant payment service that allows

for immediate transfer of money between banks 24/7 including on holidays. It
is useful for small to medium value transactions and provides a quick and
efficient way to transfer funds.

b) collection and payment of cheques: banks manage the process of

collecting and clearing cheques. When a cheque is deposited, the bank
processes it and transfer the amount from the issuer’s account to the payee’s
account. Similar to cheques ,drafts are financial instruments issued by a bank
on behalf of a customer, guaranteeing the payment of a specified amount.

c) portfolio management: banks offer portfolio management services to

individuals and institutions, helping the manage their investments according
to their financial goals and risk tolerance. This includes creating a diversified
investment portfolio, selecting appropriate financial products (like stocks,
bonds, and mutual funds,) and monitoring performance.

d) trustee services: banks can act as trustees for managing estates, trusts and
investments.

2. utility functions: unlike agency functions which involve representing clients

in specific tasks, utility functions focus on providing essential and often
routine banking services that support general financial activities.

★ draft service: a bank draft is a payment instrument issued by a bank on

behalf of a customer used to pay a specified amount to a third party. Unlike
personal checks, a bank draft is guaranteed by the issuing Bank, ensuring that
the funds are available when the draft is drawn.

★ issuance of credit and debit cards: for easy payment solutions. Credit cards
allow customers to borrow money up to a limit for purchases and paid back
later. They often come with rewards and benefits. Debit card linked to the
bank account allowing customers to spent or withdraw money directly from
the account.

★ locker facility: secure storage within the bank for valuables like jewellery
and important documents. Customers rent the locker and access it with high
security.

★ internet and mobile banking: this function allows you to manage your
accounts, transfer money, and pay bills online through your banks website or
via a smartphone app. It provides convenient access to your bank accounts
and enable on the go transactions.

★ foreign exchange services: exchange domestic currency for foreign

currency, useful for travel or international transactions. Banks also offer
international money transfers.

★ underwriting securities: banks underwrite the shares and debentures issued

by the government, public or private companies.

★ income tax consultancy: banks may also employ income tax experts to
prepare income tax returns for their customers and to help them to get a
refund of income tax.
 ★ merchant banking: some commercial banks have opened merchant
banking divisions to provide merchant banking services.

★ letter of credit: letters of credit are issued by the banks to their customers
certifying their credit worthiness. letters of credit or very useful in foreign
trade.

★ collection of statistics: banks collect statistics giving important information

relating to trade, commerce, industries, money and banking. They also publish
valuable journals and bulletins containing articles on economic and financial
matters.

ROLE OF COMMERCIAL BANKS IN ECONOMIC DEVELOPMENT

1. MOBILIZATION OF SAVINGS: commercial banks encourage people to save by
offering safe and attractive deposit facilities such as savings accounts, fixed
deposits and recurring deposits. These deposits not only secured the public
money but also offer interest, incentivizing savings.
2. CREDIT CREATION: commercial banks create credit by providing loans to various
sector of the economy. This includes businesses, industries, and individuals. The
loans provided by banks enable these entities to undertake productive activities,
purchase raw materials, expand operations, and invest in new ventures, which
fuels economic activities and growth.
3. FACILITATING TRADE AND COMMERCE: banks offer a variety of financial services
that facilitate trade and commerce. The services include trade finance letters of
credit, bill discounting, and foreign exchange services.
4. EMPLOYMENT GENERATION: by providing capital to industries and businesses,
banks help in the creation of jobs. The expansion of business and the
establishment of new enterprises made possible by bank loans result in increased
employment opportunities.
5. INFRASTRUCTURE DEVELOPMENT: commercial banks play a crucial role in
financing large scale infrastructure projects such as roads, bridges, power plants,
and urban development initiative. These projects are successful for the long term
economic development of a country.
6. FINANCIAL INCLUSION: commercial banks are instrumental in promoting
financial inclusion by extending banking services to the unbanked population,
especially in rural and under developed areas. this includes opening branches in
 remote regions and offering basic banking services like savings accounts, credit
facilities and remittance services etc.
7. PROMOTING BALANCED REGIONAL DEVELOPMENT: commercial banks provide
credit facilities to rural people by opening branches in backward areas. The funds
collected in developed regions may be channelized for investments in the under
developed regions of the country. In this way, they bring about more balanced
regional development.
8. HELP TO CONSUMERS: commercial banks advance credit for the purchase of
durable consumer items like vehicles, TV, refrigerator, etc, which are out of reach
for some consumer due to the limited paying capacity. In this way, banks help in
creating demand for such consumer goods.

RECENT TRENDS IN BANKING

1. DIGITAL TRANSFORMATION: increased adoption of digital banking services like
mobile banking apps, internet banking and digital wallets.Use of artificial
intelligence for personalized banking services, chatbots and fraud detection.
2. FINTECH COLLABORATION: by partnering with fintech companies, banks can
offer innovative services and technologies,improving customer experience and
staying competitive in a rapidly evolving market.
3. GREEN BANKING: banks are increasingly focusing on sustainable banking
practices including financing green projects and adopting eco friendly
operations.
4. CYBER SECURITY: with the rise in digital transactions banks are investing heavily
in cyber security measures to protect customer data from breaches and cyber
attacks.
5. PAYMENT BANKS AND SMALL FINANCE BANKS: emergence of new banking
models like payment banks and small finance banks to cater to niche markets
focusing on financial inclusion.
6. BLOCKCHAIN AND CRYPTOCURRENCIES: banks are exploring blockchain
technology to enhance transaction security and transparency. Additionally, there
is growing interest in developing regulatory framework to manage and integrate
crypto currencies into the financial system.
7. CUSTOMER CENTRIC INNOVATIONS: using data analytics banks are creating
Tailor financial products and services that meet individual customer needs.
 Innovations like contactless payments and instant loan approvals are also making
banking more convenient and responsi to customer preferences.
8. REGULATORY CHANGES: banks are continuously adjusting to new regulations
aimed at enhancing transparency, consumer protection, and financial stability.
This include complying with updated rules on data privacy, and anti money
laundering and fair lending practices.
9. DATA ANALYTICS: banks are increasingly using data analytics to gain insights
into customer behaviour, improve decision making, and develop more effective
marketing strategies. This helps in predicting customer needs and enhancing
overall service delivery.

DISTINGUISH BETWEEN CENTRAL BANK AND COMMERCIAL BANK

Central Bank and commercial bank are both financial institutions. But they have
got distinguishing features..