Commercial Banks is financial Institution that accepts deposits for the purpose of lending. In other words, commercial Banks provide services such as accepting deposits, giving business loans and also allow for variety of deposit accounts.
They collect money from those who have it to spare and lend to those who require it. Commercial Bank is a banker to the general public. Commercial Banks registered under Indian companies Act, 1936 and are also governed by the Indian Banking Regulation Act, 1949.
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Commercial Banks Definition
[su_quote cite=”Charles T. Horngren Indian Companies (Regulation) Act, 1949″]The accepting, for the purpose of lending or Investment, of deposits of money from public, repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise.[/su_quote]
[su_quote cite=”Prof. Kinley”]A bank is an establishment which makes to individuals such advances of money as may be required and safety made, and to which individuals entrust money when not required by them for use.[/su_quote]
[su_quote cite=”John Paget”]No body can be a banker who does not (i) take deposit accounts (ii) take current accounts, (iii) issue and pay cheques, and (iv) Collect cheques- crossed and uncrossed for its customers[/su_quote]
Structure of Commercial Banks
Commercial banks are basically of two types.
- Scheduled banks
- Non- scheduled banks
Scheduled banks are those which have been in II schedule of Reserve Banks of India act, 1934 and following criteria should satisfied.
- Minimum paid up capital Rs. 5 lakh.
- It must be a corporation as co-operative society.
- Any activity of bank will not adversely affect the interest of depositors
- Public Sector Banks: Public banks are those in which 50% of their capital is provided by central government, 15% by concerned state government and 35% by sponsored commercial banks. In India, there are 27 public sector banks.
They includes the state bank of India and its 6 associated banks such as state bank of Hyderabad, state bank of Mysore etc. and 19 nationalized banks and IDBI banks Ltd. Public sector banks mostly situated in rural area than urban area.
- Private Sector Banks: Private Banks are those in which majority of share capital kept by business house and individual. After the nationalization, entry of private sector banks is restricted. But some of private banks continued to operate such as Jammu & Kashmir bank Ltd.
To increase the competition spirit and improve the working of public sector banks, RBI permitted the entry of private sector banks in July, 1993.
- Foreign Banks: Foreign banks are those which incorporated outside India and open their branches in India. Foreign banks performed all the function like other commercial banks in India.
Foreign banks are superior in technology and management than India banks. They offer different types of products and services such as offshore banking, online banking, personal banks etc.
They provide loans for automobiles, small and large businesses. Foreign banks also provide special types of credit card which are nationally and internationally accepted. These banks earn lots of profit and create new ways of investments in the country.
- Regional Rural Banks: Regional rural banks established 1975 with mandate to ensure sufficient credit for agriculture and rural sector. RRB’s are jointly owned by government of India, concerned state government and sponsor bank.
The capital share being 50 %, 15% and 35% respectively. Now these Days, there are 14,475 regional rural banks in India. NABARD control and prepare the policies for Regional Rural Banks.
The basic objective of establishing RRB’s in India was to provide the credit to rural sector especially the small and medium farmers, artisans, agricultural labour and even small entrepreneurs.
Non Scheduled Banks
Non scheduled banks in India define in clause (C) of section 5 of Banks regulation Act 1949. Non scheduled banks are those which are not a schedule bank and their paid up capital and reserves less than Rs.5 lakh and are not included in the 2nd schedule of the Reserve Bank of India Act, 1934
Functions of Commercial Banks
Accepting deposits is one of major function of commercial bank. It is the business of bank to accept deposits so that he can lend it to other and earn interest. Basically, the money is accepted as deposit for safe keeping. Banks also pay interest on these deposits. To attract depositors banks maintain different types of accounts.
These are as following.
- Fixed Deposit Accounts: The account which is opened for fixed period by depositing amount is known as fixed deposit account. The money deposited in this account cannot be withdrawn before expiry of period. A high rate of interest is paid on fixed deposits.
- Current Deposit Account: Current deposit accounts are mostly opened by businessmen and traders who withdraw money number of times a day. Banks dose not pay interest on these types of account. The bank collects certain charges from depositors for services rendered by it.
- Saving Account: Saving account is most suited for those people who want to save money for future needs. This types of account can be opened with a minimum initial deposit. A minimum balance has to be maintained in account as prescribed by bank. Some restrictions are imposed on depositor regarding number of deposit withdrawal and amount to be withdrawn in given period.
- Recurring Deposit Account: The purpose of these accounts is to encourage public for regular saving, particularly by fixed income group. Fixed amount is deposit is deposited at regular intervals for a fixed term and repaid on maturity.
Grant of Loans and Advances
Besides accepting deposit, the second most important function of commercial bank is advancing of loan to the public. After keeping certain part of deposits received by bank as reserve and the rest of balance given as loan. The different types of loan and advances are given by bank as follow.
- Call Money : There are generally short term credit that range from one day to fort night. There are even one nigh call money advances made available to bank with the help of this market. The rate of interest depends upon the conditions prevailing in money market.
- Overdraft : In over draft, a customer can withdraw money from his current account and available balance below zero. When the amount withdrawn is within the authorized limit then rate of interest charged at agreed rate. Overdraft is allowed normally against the security of negotiable Instrument and credit worthy customers without security.
- Cash Credit: In cash credit, Bank advance loan against the customer current asset or personal guarantee. The borrower has option to withdraw the funds as and when required to extent of his needs but he cannot exceed the credit limit allowed to him. The cash credit limit depends on the debtor’s need and as agreed with the bank. The bank charges interest only on money withdrawn from by them.
- Discounting of Bills: Under this type of lending, Bank pay amount before due date of bill after deducting certain rate of discount or commission. The holder of bill get money immediately without waiting for the date of maturity. If bill of exchange dishonored on due date the bank can recover the amount from the customer.
- Direct Loan: A loans granted for a fixed maturity period more then one year. Loans are usually secured against some collateral security. The borrower can withdraw entire money through cheques. The interest is charged on entire amount of loan. Repayment of loan either in installments or in lump sum.
Credit creation is also an important function of commercial Bank. The process of credit creation automatically performed when bank accept deposits and provide loans Prof Sayers says, “Banks are not merely supply of money but in an important sense, they are manufacturers of money”. In this process, customers deposit their money in bank. Bank keeps certain amount of deposit as cash reserve and rest of balance given as loan and advances.
Banks not required to keep the entire deposits in cash. The amount of loan does not give directly to borrower. The borrower open a account and then bank deposit money in that account. Here, bank’s lends money and process of credit creation starts. The current cash reserve ratio is 6% in 2011.
These are as follow:-
- Sale and Purchased of Securities: On the behalf of customer, commercial bank sale and purchase of the securities of private companies as well as government securities.
- Transfer of Funds: Commercial Bank also provide facilities to transfer funds from one place to another place in form Bank draft, cheques, mail transfer etc.
- Collection and Payment of Credit Instrument: Commercial Bank collect and make payment on behalf of their customers Commercial Bank collect and pay negotiable instruments and also pay rent, income tax fees, insurance premium etc.
- Locker Facility: Commercial Banks provides locker facility to their customers. We can keep gold, silver and important documents in locker.
- Letter of Credit: Letter of credit certified the credit worthiness of their customers which issued by commercial banks.
- Collection of Information: Commercial Banks also collect the information relating to Industry, trade, commerce which made available to their customers.
- Traveller’s Cheque ad Credit Card: Commercial Banks issue traveller’s cheques and credit cards to their customers. They can travel without fear of theft and loss of money. Credit card is used to make payment for purchases so that individual does not have to carry cash.
- Foreign Exchange: Commercial banks provide facility to their customers dealing in foreign exchange. Commercial Banks are authorized dealers in India.
- Issuing of Gift Cheques: Commercial Banks issues the gift cheques like Rs 11,51, 101,501 etc.
- Educational Loans: Commercial Banks also provide educational loan to student for higher studies at reasonable rate of interest.
- Consumer Finance: Commercial Banks provide consumer finance facility for purchase consumer durables like televisions, refrigerators etc.
- Automated Teller Machine: Now a days with the help of ATM, we can deposit or withdraw money from our account any time.