PROJECT

ON

COMMERCIAL BANKS

BANKING AND INSURANCE

SEMESTER V

2017-18

SUBMITED

IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE

AWARD OF THE DEGREE OF BACHELOR OF COMMERCE-
BANKING & INSURANCE

BY

SADDAM KHAN

PROJECT GUIDE

PROF.KISHOR CHAUHAN

SMT. SUSHILADEVI DESHMUKH COLLAGE OF ARTS,

COMMERCE AND SCIENCE

SECTOR 4, AIROLI,NAVI MUMBAI-400708

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2
 ACKNOWLEDGEMENT

I Saddam Mainuddin Khan with Sincerity, Hardwork, gradual progress and an

exciting year, that is how I reached this level and now as I have started at the
threshold of the aside world , I take a look of the past year which I have spent in
this college by giving my best performance with the devotion of profession.

So, first of all I would like to thank our College- Sushiladevi Deshmukh Vidyalaya
& jr. Collage the Principal of our college for keeping this continuous faith and
University of Mumbai who has given us this opportunity to do this project in the
curriculum. I would also like to thank our co-ordinator Mr. Kishor Chavan and my
project guide for being very supportive and and for helping me complete this
project and I also like to thank our librarian for providing with the book which I
needed.

So, this goes to all those who have knowingly or unknowingly have been a great
support for me to accomplish the price of work.

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 DECLARATION

I’m saddam khan – student of T.Y.B.com –Banking and Insurance

Semester v (2017-2018) hereby declare that I have completed this project.

The information submitted is true and original to the best of knowledge .

Place. Navi Mumbai signature of student

Date:------------------- (saddam khan)

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 INDEX

CHAP PARTICULAR PAGE.

NAME NO
1. INTRODUCTION 8-10
2. DEFINATION AND MEANING OF COMMERCIAL BANKS 11-12
3. ROLE AND FUNCTIONS OF COMMERCIAL BANKS 13-26
4. SPECIAL ROLE OF COMMERCIAL BANKS 17-20
5. INVESTMENT OF COMMERCIAL BANKS 21-26
6. COMMERCIAL BANKS AND NATIONALISED BANKS 27-27
7. ROLE OF COMMERCIAL BANKS IN ECONOMIC 28-28
DEVELOPMENT
8. RBI PENALISES COMMERCIAL BANKS 29-30
9. COMMERCIAL BANK AND MICROFINANCE 31-35
10. TAX REFORM AFFECT COMMERCIAL BANKS 36-37
11. COMMERCIAL BANKS SERVICES PROVIDED TO THEIR 38-43
CUSTOMERS
12. EVALUATION AND STRUCTURE OF COMMERCIAL 44-52
BANKS IN INDIA
13. DIFFERENCE BETWEEN COMMERCIAL BANKS AND 53-54
RESERVE BANK
14. DIFFERENCE BETWEEN COMMERCIAL BANKING AND 55-56
INVESTMENT BANKING

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15. MAJOR ADVANTAGES OF COMMERCIAL BANKS 57-59
16. FUCTION:-
MAJOR DISADVANTAGES OF COMMERCIAL BANKS 60-60
17. RESEARCH METHODOLOGY
18. CONCLUSION
19. REFRENCES
20. BIBILOGRAPHY
21. QUESTIONNAIRE
22. RESEARCH METHODOLOGY 61- 61
23. CONCLUSION 62- 62
24. REFERENCES 63-64
25. BIBLOGRAPHY 65-67

26+. QUESTIONNAIRE 69-70

INDEX

6
 INTRODUCTION
Commercial banks are the oldest, biggest, and fastest growing intermediaries in
India. they are also the most important depositories of public saving and the most
important disburses of finance. commercial banking in India is a unique systems,
the like of which exist nowhere in the world. the truth of this statement becomes
clear as one studies the philosophy and approaches that have contributed to the
evolution of the banking policy, programmes and operation in India.

The banking systems in India works under the constraints that go with social
control and public ownership. the public ownership of banks has been achieved in
three stages:1955,July1969, and April 1980. Not only the private sector and
foreign banks are required to meet targets in respect of sectoral development of
credit, regional distribution of branches, and regional credit- deposits ratios. the
operations of banks have been determined by Lead Bank Scheme, Differential Rate
of Interest Scheme, Credit Authorisation Scheme, inventory norms and lending

7
systems prescribed by the authorities, the formulation of the credit plans, and
Service Area Approach.

A commercial bank is a type of financial intermediary and a type of bank.

Commercial banking is also known as business banking. It is a bank that provides
checking accounts, savings accounts, and money market accounts and that accepts
time deposits. After the Great Depression, the U.S. Congress required that banks
engage only in banking activities, whereas investment banks were limited to
capital market activities. As the two no longer have to be under separate ownership
under U.S. law, some use the term "commercial bank" to refer to a bank or a
division of a bank primarily dealing with deposits and loans from corporations or
large businesses. In some other jurisdictions, the strict separation of investment and
commercial banking never applied. Commercial banking may also be seen as
distinct from retail banking, which involves the provision of financial services
direct to consumers. Many banks offer both commercial and retail banking
services.

8
A commercial bank is a type of financial intermediary and a type of bank.
Commercial banking is also known as business banking. It is a bank that provides
checking accounts, savings accounts market activities. As the two no longer have
to be under separate ownership under U.S. law, some use the term "commercial
bank" to refer to a bank or a division of a bank primarily dealing.

1.1 COMMERCIAL BANKS BASIC DEPOSITS, CREDIT, CRR AND

SLR IS COMPULSORY TO KEEP WITH RBI

Deposits Rs. 17,81,580 Crore

Credits Rs. 11,27,433 Crore

Bank Rate 6% (even in Oct 2005)

Prime Lending Rate (PLR) in between 10.5% -11.50%

CRR 4.50%

SLR 25%

9
Presently, as a part of deregulation many new generation private sector banks have
been permitted viz. ICICI 1 (IDBI) HDFC and the nationalized banks are being
privatized to the extent of 49%.

2. DEFINATIO AND MEANING

2.1DEFINITION

Section 5 [b] of the Act define, banking as, "accepting for the purpose of lending or
investment of deposits of money from the public repayable on demand or otherwise
& withdrawal by Cheques, Drafts, Order or Otherwise".

According to Prof. Sayers, "A bank is an institution whose debts are widely accepted
in settlement of other people's debts to each other." In this definition Sayers has
emphasized the transactions from debts which are raised by a financial institution..

2.2 MEANING
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A commercial bank is a financial intermediary which collects credit from lenders
in the form of deposits and lends in the form of loans. A commercial bank holds
deposits for individuals and businesses in the form of checking and savings
accounts and certificates of deposit of varying maturities while a commercial bank
issues loans in the form of personal and business loans as well as mortgages. The
term commercial bank came about as a way to distinguish it from an "investment
bank." The primary difference between a commercial bank and its counterpart is
that a commercial bank earns revenue by issuing primary loans from its pool of
deposits while an investment bank brings debt and equity offerings to market for a
fee. Among its assets, including loans, a commercial bank holds a portfolio of
other securities to generate proprietary income.

Commercial banking activites are different than those of investment banking,

which include underwriting, acting as an intermediary between an issuer of
securities and the investing public, facilitating mergers and other corporate
reorganizations, and also acting as a broker for institutional clients.

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 3. THE ROLE AND FUNCTIONS OF OF COMMERCIAL
BANKS

Commercial banks engaged in the following activities:

3.1 PRIMARY FUNCTIONS

processing of payments by way of telegraphic transfer, EFTPOS, internet

banking, or other means.
 Accepting Deposits : Commercial bank accepts various types of deposits from
public especially from its clients. It includes saving account deposits, recurring
account deposits, fixed deposits, etc. These deposits are payable after a certain
time period.

 Making Advances : The commercial banks provide loans and advances of various
forms. It includes an over draft facility, cash credit, bill discounting, etc. They also

12
give demand and demand and term loans to all types of clients against proper
security.

 Credit creation : It is most significant function of the commercial banks.

While sanctioning a loan to a customer, a bank does not provide cash to
the borrower Instead it opens a deposit account from where the borrower
can withdraw. In other words while sanctioning a loan a bank
automatically creates deposits. This is known as a credit creation from
commercial bank.

 lending money by overdraft, installment loan, or other means

providing documentary and standby letter of credit, guarantees,
performance bonds, securities underwriting commitments and other forms
of off balance sheet exposures

 Discounting of Bills:- Banks provide short-term finance by discounting

bills, that is, making payment of the amount before the due date of the
bills after deducting a certain rate of discount. The party gets the funds
without waiting for the date of maturity of the bills. In case any bill is
dishonoured on the due date, the bank can recover the amount from the
customer.

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  Overdraft:- Overdraft is also a credit facility granted by bank. A customer
who has a current account with the bank is allowed to withdraw more than
the amount of credit balance in his account. It is a temporary arrangement.
Overdraft facility with a specified limit is allowed either on the security of
assets, or on personal security.

3.2 SECONDARY FUNCTIONS OF COMMERCIAL BANKS

Along with the primary functions each commercial bank has to perform several
secondary functions too. It includes many agency functions or general utility
functions. The secondary functions of commercial banks can be divided into
agency functions and utility functions.

Agency Functions : Various agency functions of commercial banks are

To collect and clear cheque, dividends and interest warrant.

To make payment of rent, insurance premium, etc.

To deal in foreign exchange transactions.

To purchase and sell securities.

To act as trusty, attorney, correspondent and executor.

To accept tax proceeds and tax returns.

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General Utility Functions : The general utility functions of the commercial banks
include

To provide money transfer facility.

To issue traveller's cheque.

To act as referees.

To accept various bills for payment e.g phone bills, gas bills, water bills, etc.

To provide merchant banking facility.

To provide various cards such as credit cards, debit cards, Smart cards, etc.

Besides the primary of accepting deposits and lending money,

banks perform a number of other functions which are called secondary

functions. These are as follows -

a) Issuing letters of credit, travellers cheques, circular notes etc.

b) Undertaking safe custody of valuables, important documents, and

securities by providing safe deposit vaults or lockers;

c) Providing customers with facilities of foreign exchange.

d) Transferring money from one place to another; and from one

branch to another branch of the bank.

e) Standing guarantee on behalf of its customers, for making

PAYMENTS for purchase of goods, machinery, vehicles etc.

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f) Collecting and supplying business information;

g) Issuing demand drafts and pay orders; and,

h) Providing reports on the credit worthiness of customers.

4. SPECIAL ROLE OF COMMERCIAL BANKS

As said earlier, commercial banks have a special role in India. In fact, many
financial experts even abroad have, of late, been emphasising the special place that
banks hold in their countries also. The "privileged role" of the banks is the result of
their unique features. For example, the liabilities of banks are money, and,
therefore, they are an important part of the payments mechanism of any country;
they also have access to the discount window of the RBI, call money market (as
both borrowers and lenders), and the deposit insurance. It would be difficult to
eliminate such distinctive features of banks in the near future. There is also an
important question as to whether they should be wiped out, and, if it is done,
whether it would not have adverse consequences on the financial system.

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For a financial system to mobilise and allocate savings of the country successfully
and productively, and to facilitate day-to-day transactions, there must be a class of
financial institutions that the public views as safe and convenient outlets for its
savings. In virtually all countries, the single dominant class of institutions that has
emerged to play this crucial role as both the repository of a large fraction of the
society's liquid savings and the entity through which payments are made is the
commercial banks. The structure and working of the banking system are integral to
a country's financial stability and economic growth.

Bank lending is specially important for companies. The theory of financial

contracting under asymmetric information holds that information-intensive and
information-problematic firms submit to the tight and detailed loan covenants so as
to reduce agency costs. They delegate the tasks of monitoring and renegotiating
debt contracts to financial intermediaries because these tasks are costly and the
intermediaries are in a better position to reduce the costs. Intermediaries are more
efficient in monitoring debt contracts because they are unlikely to free-ride on
information-production by others as they have a larger stake, and they can
renegotiate contracts more cheaply than the dispersed debenture holders. The
public bond covenants tend to set their conditions on events that are relatively easy
to verify, viz., a major change in capital structure or a downgrading of credit
rating. In contrast, the intermediary loan contracts are conditioned by performance
measures such as working capital and net worth which are less easily controlled by
the managers.

Further, the violation of a financial covenant often triggers financial distress. When
this happens, banks can restructure the terms of contracts, viz., wave covenants,

17
extend maturity, extend more loans, and require more collateral. Such a flexibility
reduces the cost of financial distress. Information asymmetries and free-riding by
bond-holders, on the other hand, may force the financially distressed firms into
inefficient spending cutbacks, and even bankruptcy. It has been found in the US
that the firms' stock prices rise after an announcement that they have received bank
loans, while they fall in response to announcement of a public bond offering.

Similarly, there are reasons why loans from even other financial institutions may
not be a perfect substitute for bank loans. The economies of scope between deposit
taking and lending give banks an information advantage over finance companies
and other financial institutions. The deposit history of firms may inform banks
about the credit risk involved in lending to these firms. Information on deposits
activity may also make it easier for banks to monitor working capital covenants.
The phenomenon of "compensating balances" can mostly exist only in the case of
banks, and not other institutions. The lending and deposit-taking activities of banks
are complementary, and, go to build up banking relationship which increases the
availability of funds to the firms, which, in turn, enables them to partially avoid
taking more expensive trade credit. Personal relationships are far less important in
borrowing from other financial institutions than from banks. Moreover, significant
differences in collateral requirements exist between banks and other financial
institutions. All such differences effectively segment the market for business
lending, and make bank loans highly unsubstitutable.

The Indian banking system has a very wide reach and deep presence in
metropolises, cities, semi-urban areas, and the remotest corners of the rural areas

18
with its vast number of branches. It is one of the largest banking systems in the
world. It has been rightly claimed in certain circles that the diversification and
development of the Indian economy are in no small measure due to the active role
banks have played in financing economic activities of different sectors They have
been playing an important role in developing mutual funds, merchant banks,
Primary Dealers, asset management companies, and debt markets. They operate as
issuers, investors, underwriters, guarantors in financial-markets. By their
participation, banks influence the growth and liquidity of debt markets.

They would help in securitisation of debt market. They hold about 60 per cent of
debt stock of government securities, and they account for more than 50 per cent of
the issuance of bonds through public issues and private placements.

Because of such considerations, the important position which banks have

historically come to occupy in India should not be unwittingly destroyed or
undermine in the name of promoting equity culture. Otherwise, monetary
authorities would find it more and more difficult to achieve the goal of stability of
the financial system and of the prices. The banking reforms, therefore, must aim
not only at profitable banking but also at a viable, sound, safe, and social banking.

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 5. INVESTMENT OF COMMERCIAL BANKS

5.1 BANKS HAVE FOUR CATEGORIES OF ASSETS:

¨ Cash in hand and balances with the RBI,

¨ Assets with the banking system,

¨ Investments in government and other approved securities, and

¨ Bank credit.

Among these assets, investment in cash and government securities serves the
liquidity requirements of banks and is influenced by the RBI policy.
Quantitatively, bank credit and investment in government securities are banks'
most important assets. Commercial banks in India invest a negligible part of their
resources in shares and debentures of joint stock companies. In fact, for a long time
they were discouraged from undertaking such investments. However, since 2/3

20
years, the policy in this regard has been liberalised and at present banks are
allowed to invest five per cent of their incremental deposits in corporate shares and
convertible debentures.

Commercial banks' investments are of three types:

(a) Government of India securities;

(b) other approved securities, and

(c) non- approved securities.

While the first two types are known as SLR securities, the third one is known as
non-SLR securities.

5.2 INVESTMENT IN SLR SECURITIES

At present, the banks are statutorily required to invest 25 per cent of their demand
and time liabilities in the first two types of securities. The investments in the first
type of securities is the major part of banks' investments. The government
securities accounted for 95.59 per cent of their total investment portfolio in 2002-
03. Their investments in the second type are marginal, while those in the third type
are emerging as substantial investments.

The commercial banks' investments in Central government securities were 28.1 per
cent and 31. 6 per cent of their total assets in 2001-02 and 2002-03, respectively.
The other approved securities accounted for hardly one-or two per cent of the
assets of commercial banks in the years just mentioned.

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The phenomenon of investments in government securities far in excess of statutory
requirements has been due to

(a) high fiscal deficit effect,

(b) capital adequacy norms effect,

(c) foreign exchange sterilisation effect, and

(d) slack credit demand effect.

All these effects are easy to understand. The fiscal deficit has been largely financed
through public borrowings, and the banks have been the major subscribers to the
government borrowing programme. Similarly, due to unprecedented and heavy
increase in foreign exchange accruals, the RBI has been carrying out an intensive
sterilisation Programme which has resulted in a significant increase in the supply
of government securities, which the banks have been purchasing. Further, all
scheduled banks are required to maintain minimum capital to total risk weighted
assets ratio which was nine per cent in 2002-03. Given the very-low-risk (risk less)
nature of the government securities, banks have preferred to buy and hold
substantial amount of government securities for this purpose also. Finally, due to
industrial recession in the recent past, the industrial sector's credit off take has been
slack, and banks, therefore, have invested their surplus liquidity in government
securities.

Thus, the banks' investments in government securities cannot really be decided in

terms of the ideology of public vs. private sector. The large size of the State and
the attendant enormous volume of government expenditure, the portfolio
management considerations of banks, the accrual of resources to the banks, foreign
capital flows, and demand for credit, have always determined and will continue to

22
determine the level of investment-deposit ratio of banks. Hence, it is erroneous to
argue, as the RBI has done, that a large recourse of banks to gilts to invest their
resources is a dissipation of "banking knowledge capital" regarding credit
appraisal, or a possibility of severing of the link between liquidity, credit, money,
and economic activity.

5.3 INVESTMENT IN NON-SLR SECURITIES

After 1985, there has been a liberalisation of investment norms for banks which
has enabled them to be active players in financial markets. The ambit of eligible
investments has been enlarged to cover Commercial Paper (CP)" units of mutual
funds, shares and debentures of PSUs, and shares and debentures of private
corporate sector, which are all known as non-SLR investments. Similarly, the limit
on investments in the capital market has been gradually increased. Now, banks can
invest in equities to the extent of five per cent of their outstanding (and not
incremental as earlier) advances. Effective May 2001, the total exposure of a bank
to stock markets with sub-ceilings for total advances to all stock brokers and
merchant bankers has been limited to five per cent of the total advances (including
CPs) as on March 31 of the previous year.

The aggregate balance sheet of SCBs expanded at a higher rate of 19.3% excluding
the impact of conversion of a non-banking entity into a banking entity since
October 1, 2004) during 2004-2005 as compared with 16.2 percent in 2003-04. The
ratio of assets of SCBs to GDP at factor cost at current prices increased
significantly to 80% from 78.3% in 2003-04 reflecting further deepening of
leverage enjoyed by the banking sector. The degree of leverage enjoyed by the
banking system as reflected in the equity multiplier declined to 15.8-16.9 in the
previous year.

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The behavior of major balance sheet indicators show that a divergent during 2004-
05. on the back of robust economic growth and industrial recovery, loans and
advances witnessed strong growth, while investment in rising interest rate scenario,
slowed down significantly. Deposits showed a lackluster performance in the wake
of increased competition from other saving instruments. Borrowings and net-
owned funds however, increased sharply underscoring the growing importance of
non-deposits resources of SCBs.

Bank group-wise, assets of new private sector banks grew at the highest
rate.(19.4%),followed by public sector banks(15.1%eacluding the conversion
impact),foreign banks (13.6%) and old private sector banks (10.6%).PSBs
continued to accounts for the major share in he total assets, deposits, advances and
investments of SCBs at end-March 2005, followed distantly by new private sector
banks. The share of foreign banks in total assets and advances was higher than that
of old private sector banks.

5.4 DEPOSITS

Deposits of SCBs grew at a lower rate 15.4 per cent (excluding the conversion
impact) during 2004-05 as compared with 16.4 per cent in the previous year on
account of slowdown in demand deposits and savings deposits. Deceleration in
demand deposits was due mainly to the base effect as demand deposits had
witnessed an usually high growth last year. The growth in demand deposits,
however was in line with the long-term average. Savings deposits, which reflect
the strength of the retail liability franchise and are at the core of the banks’
customer acquisition efforts grew at a healthy rate, though the growth was
somewhat lower than the high growth of last year. The higher growth of term
deposits was mainly o ac count of NRI deposits and certificate of deposits

24
(CDs).Excluding these deposits, the growth rate of term deposits showed a
declaration, which was on account of a possible substitution in favour of postal
deposits and other investments products, which continued to grow at a high rate
benefiting from tax incentives and their attractive rate of return in comparison with
time deposits.

Factors Affecting Composition of Bank Deposits

The following factors appear to be relevant:

(a) Increase in national income.

(b) Expansion of banking facilities in new areas and for new classes of

people.

(c) Increase of banking habit.

(d) Increase in the relative rates of return on deposits.

(e) Increase in deficit financing.

(f) Increase in bank credit.

(g) Inflow of deposits from Non-Resident Indians (NRIs).

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(h) Growth of substitutes.

6. COMMERCIAL BANKS AND NATIONALALISED

BANKS

14 banks are nationalised banks in india. there are canara bank,karnataka

bank,state bank of india,indian bank and many more...

PSU bank-The term public sector banks is used commonly in India. This refers to
banks that have their shares listed in the stock exchanges NSE and BSE and also
the government of India holds majority stake in these banks.Eg:-State bank of
india.

Commercial bank:- An institution which accepts deposits, makes business loans,

and offers related services. Commercial banks also allow for a variety of deposit
accounts, such as checking, savings, and time deposit. These institutions are run to
make a profit and owned by a group of individuals, yet some may be members of
the Federal Reserve System. While commercial banks offer services to

26
individuals, they are primarily concerned with receiving deposits and lending to
businesses. Commercial Banks in India are broadly categorized into Scheduled
Commercial Banks and Unscheduled Commercial Banks. The Scheduled
Commercial Banks have been listed under the Second Schedule of the Reserve
Bank of India Act, 1934. The selection measure for listing a bank under the
Second Schedule was provided in section 42 (60 of the Reserve Bank of India Act,
1934. Eg:-HDFC bank,ICICI bank,Federal Bank etc

7 . ROLE OF COMMERCIAL BANKS IN THE ECONOMIC

DEVELOPMENT OF A COUNTRY

Commercial banks are one of the three primary agents which help circulating funds
in the market. Commercial banks provide loans and corporate bonds to the
households, new start ups and small medium enterprises to run their businesses. It
also obtains money from the households and invests that money to other profitable
investments. The money held as customer account then accrues interest which is
given to the customer in the form of periodic payments. The commercial banks
play an important part of economy when they are involved in bidding process of
government securities. Various services and products provided by commercial
banks such as car leasing, mortgage financing, credit cards etc provide easy

27
accessibility of funds to the customers. Hence great deal of money circulated in the
economy is contributed by the commercial banks. Commercial banks are also an
important element in implementing the monetary and fiscal policy by the central
bank.

When a centralbank decides to introduce concretionary monetary policy,

commercial banks have to increase their interest rates to comply with the central
bank. Therefore commercial banks play an important in bringing economic
development of a country. If the banking system in a country is effective, efficient
and disciplined it brings about a rapid growth in the various sectors of the
economy.

8 . RBI PENALISES 19 COMMERCIAL BANKS

Srinagar, May 1: The Reserve Bank of India has imposed penalties on 19

commercial banks.

A notification by the central bank, copy of which is available on its site, said in
exercise of the powers vested with it under the provisions of Section 47A(1)

(b) Read with Section 46(4)(i) of the Banking Regulation Act, 1949, the RBI has
imposed penalties on 19 commercial banks.

Some of the banks on whom the penalties have been imposed are ICICI Bank,
HDFC Bank, PNB Paribas, Yes Bank, etc.

28
“The penalties have been imposed for contravention of various instructions issued
by the Reserve Bank in respect of derivatives, such as, failure to carry out due
diligence in regard to suitability of products, selling derivative products to users
not having risk management policies and not verifying the underlying/ adequacy of
underlying and eligible limits under past performance route,” it said.

The notification, a copy of which is with Greater Kashmir, reads: “The Reserve
Bank had issued Show Cause Notices to these banks. In response to this, the banks
submitted their written replies. On a careful examination of the banks’ written
replies and the oral submissions made during the personal hearings, the Reserve
Bank found that the violations were established and the penalties were thus
imposed.”

The banks have been imposed the penalty of Rs 5 lakh to Rs 15 lakh. While the
ICICI Bank, HDFC Bank and Yes Bank each have been imposed a penalty of Rs
15 lakhs, the PNB Paribas has been saddled with a penalty of Rs 10 lakhs.

29
 9 . COMMERCIAL BANKS AND MICROFINANCE

Within the spectrum of lower-income population who lack access to financial

services, a distinction can be drawn between the extremely poor and the
economically active poor. The extremely poor are considered to be those
individuals who have insufficient resources to meet defined basic consumption
needs, including people who are not qualified to work (due to age, health and
ethnic origin reasons, among others) or whose income is so low that they are not
able to meet their household basic needs. This group has prior needs such as food
and shelter, and therefore requires tools distinct from financial services to get out
of poverty.

In this regard, Robinson M.S. (2001) asserts: “It is sometimes forgotten —

although generally not by borrowers— that another word for credit is debt. When
loans are provided to the very poor, the borrowers may not be able to use the loans

30
effectively because they lack opportunities for profitable self-employment (…),
(thus being) unable to repay loan principal and interest.”

9.1 INCENTIVES AND DISINCENTIVES FOR COMMERCIAL

BANKS ENTRY INTO MF

Banks and financial institutions have been entering the microfinance market in
increasing numbers over the past years. This phenomenon (known as
downscaling), together with that of upgrading, is resulting in a growing number of
formal regulated institutions partially or totally moving into MF.

It is necessary to analyze what drives a traditional banker to engage in MF in order

to fully understand why downscaling has developed so much worldwide. There
are several factors that motivate the bank to start making microloans. These
factors are related both to the bank’s internal organization and to the market in
which this bank operates. However, the main incentive is basically related to the
fact that profits are in line with the risks incurred.

Growing competition in markets traditionally served by banks —e.g., loans to big

companies, small and medium-sized businesses and consumers— along with the
resulting fall in banks’ returns has encouraged the search for new market niches. In
countries with no experience in MF, there exists an unattended market segment
which may be viewed by banks as a potential source of rapid growth and positive
returns.

31
Entering a new sector enables banks to diversify their loan portfolio, focusing on a
population segment previously unattended by them. By making loans to thousands
of small borrowers, the microlending portfolio itself achieves substantial
diversification in terms of number of clients served, although the level of
diversification by activity and geographical area is usually low. Commercial banks
can overcome this obstacle thanks to their branch networks across the major cities
in the country. In addition, the performance of the microlending portfolio may
have low correlations with traditional bank business lines due to the very different
nature of the clients and activities. Similarly, having a sector specialized in MF
may help commercial banks improve their public image, as caring for the most
disadvantaged social sectors is welcomed by clients and society in general.

9.2 DRIVERS FOR BANK ENTRY INTO MICROFINANCE

Internal Factor External Factor

Profit Large microenterpise or low-income
market
Risk diversification Competition
Excess liquidity Trend or fad
Image Regulations
Cross-selling opportunities Government or donor initiative
Bank leadership Market pressure on margins
Social responsibility Desertion of traditional clients

32
Public relations
Compatibility with bank strategy

9.3 ACTIVITIES (GENERALLY) AUTHORIZED BY THE BCRA TO

BE PERFORMED BY COMMERCIAL BANKS AND FINANCE
COMPANIES:-

1. Stock exchange brokers or dealers operating outside the stock exchange.

networks’ exploitation and management.

3. Systems for electronic transmission of transactions with institutions and/or

clients.

4. Pension funds management.

33
5. Mutual fund portfolio management (management company).

6. Issuance of credit/debit and other similar instruments.

7. Closed savings management.

8. Financial assistance through leasing transactions of capital goods, durable goods

and real estate, acquired for such

purpose (“leasing”) or over credits arising from sales (“factoring”).

9. Management of public utilities, loan, etc. collection, payment of salaries,

payments to suppliers and fiscal receipt

collection.

10. Services of data processing and/or transmission of information related to

financial activities.

11. Services of credit information for commercial and financial use (financial
record database)

12. Advice on financial and investment issues, and for mergers and/or acquisitions
of companies, provided that this

13. Mutual guarantee companies, acting as protector partner.

14. Funds management and/or trusts administration advice as regards activities

consistent with the institution type.

15. Financial trusts fiduciary.

16. Transportation and/or custody of money and securities, including transport

service of mailing and financial

34
documentation of institutions and/or their customers. Associated security service
for local financial institutions. In

both cases, as long as it is a complement of the service provided to the owner

institution/s.

17. Service of securities and book-entry mortgage bond registry officer

18. Service of liquidation of securities operations.

19. Clearing houses.

20. Temporary acquisition of interest in companies in order to facilitate their

development, with the aim of selling the

relevant stock holdings in the future. Financial advice on planning and managing to
such companies.

10. TAX REFORM AFFECT COMMERCIAL BANKS

Iast year, Congress enacted the Tax Reform Act of 1986, which fundamentally
restructures and sim- plifies the federal income tax system. Beginning in 1987,
individuals and corporations face much simpler federal income tax rules that
contain lower marginal tax rates. There is widespread speculation about the
effects of such sweeping federal income tax reform. Economists, policymakers,
and politicians are debating the extent to which the new tax rules could adversely
affect specific economic sectors or groups, particularly capital-intensive indumies,
certain income classes of individual taxpayers, real estate, and the banking

35
industry. In the commercial banking industry, the new tax rules will affect banks at
a time when the commercial banking system is undergoing profound structural
changes that are eroding the industry's ability to consistently generate healthy
profits on traditional banking products and services. During the balance of the
1980s and into the 19!90s, commercial banks will face several critical issues,
including risk-based capital standards, deregulation, broader geographic
competition, and possibly increasing competition fiom nonbank companies like
Sears, Roebuck and Company, and Merrill Lynch & Co., Inc.

Tax-Exempt Securities. Under the old tax rules, commercial banks could deduct
80 percent of interest expenses that were incurred to carry taxexempt securities in
their asset portfolios. As a consequence, there was a strong incentive for
commercial banks to hold municipal securities to reduce their federal tax burden.

The new tax rules disallow 100 percent of the interest charge for carrying
municipal obligations acquired after August 7 , 1986. There is one exception:
under the new tax rules, a municipality still will be permitted to sell up to $10
million of bonds to a financial institution per year, and the financial institution can
apply the old interest expense disallowance rule (20 per- cent) to the bonds.

The old tax law required that a commercial bank determine its bad-debt reserve
deduction for tax purposes by using one of two methods: the experience method or
the percentage method. Under the experience method, a bank bases its loan-loss
deduction on the average loan losses of the previous six years. Under the
percentage method, a bank deducts provisions to a loan-loss reserve equal to 0.6
percent of eligible loans outstanding.

36
 11. COMMERCIAL BANKS SERVICES PROVIDED TO
THEIR CUSTOMERS

Different modes of Acceptance of Deposits

Banks receive money from the public by way of deposits. The following

types of deposits are usually received by banks:

i) Current deposit

ii) Saving deposit

37
iii) Fixed deposit26 :: Business Studies

iv) Recurring deposit

v) Miscellaneous deposits

i) Current Deposit

Also called ‘demand deposit’, current deposit can be withdrawn by the depositor at
any time by cheques. Businessmen generally open current accounts with banks.
Current accounts do not carry any interest as the amount deposited in these
accounts is repayable on demand without any restriction.

The Reserve bank of India prohibits payment of interest on current accounts or on

deposits upto 14 Days or less except where prior sanction has been obtained.
Banks usually charge a small amount known as incidental charges on current
deposit accounts depending on the number of transaction. Savings deposit/Savings
Bank Accounts Savings deposit account is meant for individuals who wish to
deposit small amounts out of their current income. It helps in safe guarding their
future and also earning interest on the savings. A saving account c an be opened
wi th or wi thout cheque book f a c i l i ty. The r e a r e restrictions on the
withdrawls from this account. Savings account holders are also allowed to deposit
cheques, drafts, dividend warrants, etc. drawn in their favour for collection by the
bank. To open a savings account, it is necessary for the depositor to be introduced
by a person having a current or savings account with the same bank.

Fixed deposit

The term ‘Fixed deposit’ means deposit repayable after the expiry of a specified
period. Since it is repayable only after a fixed period of time, which is to be
determined at the time of opening of the account, it is also known as time deposit.

38
Fixed deposits are most useful for a commercial bank. Since they are repayable
only after a fixed period, the bank may invest these funds more profitably by
lending at higher rates of interest and for relatively longer periods. The rate of
interest on fixed deposits depends upon the period of deposits. The longer the
period, the higher is the rate of interest offered. The rate of interest toFunctions of

Commercial Banks :

be allowed on fixed deposits is governed by rules laid down by the

Reserve Bank of India.

Recurring Deposits

Recurring Deposits are gaining wide popularity these days. Under this type of
deposit, the depositor is required to deposit a fixed amount of money every month
for a specific period of time. Each instalment may vary from Rs.5/- to Rs.500/- or
more per month and the period of account may vary from 12 months to 10 years.
After the completion of the specified period, the customer gets back all his deposits
alongwith the cumulative interest accrued on the deposits.

Miscellaneous Deposits

Banks have introduced several deposit schemes to attract deposits from different
types of people, like Home Construction deposit scheme, Sickness Benefit deposit
scheme, Children Gift plan, Old age pension

scheme, Mini deposit scheme, etc.

Different methods of Granting Loans by Bank

The basic function of a commercial bank is to make loans and advances out of the
money which is received from the public by way of deposits. The loans are
39
particularly granted to businessmen and members of the public against personal
security, gold and silver and other movable and immovable assets. Commercial
bank generally lend money in the

following form:

i) Cash credit

ii) Loans

iii) Bank overdraft, and

iv) Discounting of Bills

i) Cash Credit :

A cash credit is an arrangement whereby the bank agrees to lend money to the
borrower upto a certain limit. The bank puts this amount of money to the credit of
the borrower. The borrower draws the money28 :: Business Studies as and when
he needs. Interest is charged only on the amount actually drawn and not on the
amount placed to the credit of borrower’s account. Cash credit is generally granted
on a bond of credit or certain other securities. This a very popular method of
lending in our country.

ii) Loans :

A specified amount sanctioned by a bank to the customer is called a ‘loan’. It is

granted for a fixed period, say six months, or a year. The specified amount is put
on the credit of the borrower’s account. He can withdraw this amount in lump sum
or can draw cheques against this sum for any amount. Interest is charged on the
full amount even if the borrower does not utilise it. The rate of interest is lower on
loans in comparison to cash credit. A loan is generally granted against the security

40
of property or personal security. The loan may be repaid in lump sum or in
instalments. Every bank has its own procedure of granting loans. Hence a bank is
at liberty to grant loan depending on its own resources.

The loan can be granted as:

a) Demand loan, or

b) Term loan

a) Demand loan

Demand loan is repayable on demand. In other words it is repayable at short

notice. The entire amount of demand loan is disbursed at one time and the
borrower has to pay interest on it. The borrower can repay the loan either in
lumpsum (one time) or as agreed with the bank. Loans are normally granted by the
bank against tangible securities including securities like N.S.C., Kisan Vikas Patra,
Life Insurance policies and U.T.I. certificates.

b) Term loans

Medium and long term loans are called ‘Term loans’. Term loans are granted for
more than one year and repayment of such loans is spread over a longer period.
The repayment is generally made in suitable instalments of fixed amount. These
loans are repayable over a period of 5 years and maximum upto 15 years.

Functions of Commercial Banks ::

Term loan is required for the purpose of setting up of new business activity,
renovation, modernisation, expansion/extension of existing units, purchase of plant
and machinery, vehicles, land for setting up a factory, construction of factory
building or purchase of other immovable assets. These loans are generally secured

41
against the mortgage of land, plant and machinery, building and other securities.
The normal rate of interest charged for such loans is generally quite high.

iii) Bank Overdraft

Overdraft facility is more or less similar to cash credit facility. Overdraft facility is
the result of an agreement with the bank by which a current account holder is
allowed to withdraw a specified amount over and above the credit balance in
his/her account. It is a short term facility. This facility is made available to current
account holders who operate their account through cheques. The customer is
permitted to withdraw the amount as and when he/she needs it and to repay it
through deposits in his account as and when it is convenient to him/her. Overdraft
facility is generally granted by bank on the basis of a written request by the
customer. Some times, banks also insist on either a promissory note from the
borrower or personal security to ensure safety of funds. Interest is charged on
actual amount withdrawn by the customer. The interest rate on overdraft is higher
than that of the rate on loan.

iv) Discounting of Bills

Apart from granting cash credit, loans and overdraft, banks also grant financial
assistance to customers by discounting bills of exchange. Banks purchase the bills
at face value minus interest at current rate of interest for the period of the bill. This
is known as ‘discounting of bills’. Bills of exchange are negotiable instruments and
enable the debtors to discharge their obligations towards their creditors. Such bills
of exchange arise out of commercial transactions both in internal trade and external
trade. By discounting these bills before they are due for a nominal amount, the
banks help the business community. Of course, the banks recover the full amount
of these bills from the persons liable to make

42
 12. EVALUATION AND STRUCTURE OF
COMMERCIAL BANKS IN INDIA

12.1 INTRODUCTION

Opinions differ as to the origin of the work "Banking". The word "Bank" is said to
be of Germanic origin, cognate with the French word "Banque" and the Italian
word "Banca", both meaning "bench". It is surmised that the word would have
drawn its meaning from the practice of the Jewish money-changers of Lombardy, a
district in North Italy, who in the middle ages used to do their business sitting on a
bench in the market place. Again, the etymological origin of the word gains further
relevance from the derivation of the word "Bankrupt" from the French word
"Banque route" and the Italian word "Banca-rotta" meaning "Broken bench" due
probably to the then prevalent practice of breaking the bench of the money-
changer, when he failed.

Banking is different from money-lending but two terms have in practice been taken
to convey the same meaning. Banking has two important functions to perform, one
of accepting deposits and other of lending monies and/or investment of funds. It
43
follows from the above that the rates of interest allowed on deposits and charged
on advances must be known and reasonable. The money-lender advances money
out of his own private wealth, hardly accepts deposits and usually charges high
rates of interest. More often, the rates of interest relate to the needs of the
borrower. Money-lending was practised in all countries including India, much
earlier than the recent type of Banking came on scene.

In the earlier societies functions of a bank were done by the corresponding

institutions dealing with loans and advances. Britishers brought into India the
modern concept of banking by the start of Bank of England in 1694. In 1708, the
bank of England was given the monopoly for the issue of currency notes by an Act.
In nineteenth century various banks started operations, which primarily were
receiving money on deposits, lending money, transferring money from one place to
another and bill discounting.

HISTORY OF BANKING IN INDIA:

Banking in India has a very old origin. It started in the Vedic period where
literature shows the giving of loans to others on interest. The interest rates ranged
from two to five percent per month. The payment of debt was made pious
obligation on the heir of the dead person.

Modern banking in India began with the rise of power of the British. To raise the
resources for the attaining the power the East India Company on 2nd June 1806
promoted the Bank of Calcutta. In the mean while two other banks Bank of
Bombay and Bank of Madras were started on 15th April 1840 and 1st July, 1843
respectively. In 1862 the right to issue the notes was taken away from the

44
presidency banks. The government also withdrew the nominee directors from these
banks. The bank of Bombay collapsed in 1867 and was put under the voluntary
liquidation in 1868 and was finally wound up in 1872. The bank was however able
to meet the liability of public in full. A new bank called new Bank of Bombay was
started in 1867.

On 27th January 1921 all the three presidency banks were merged together to form
the Imperial Bank by passing the Imperial Bank of India Act, 1920. The bank did
not have the right to issue the notes but had the permission to manage the clearing
house and hold Government balances. In 1934, Reserve Bank of India came into
being which was made the Central Bank and had power to issue the notes and was
also the banker to the Government. The Imperial Bank was given right to act as the
agent of the Reserve Bank of India and represent the bank where it had no braches.

In 1955 by passing the State Bank of India 1955, the Imperial Bank was taken over
and assets were vested in a new bank, the State Bank of India..

Bank Nationalization:

After the independence the major historical event in banking sector was the
nationalization of 14 major banks on 19th July 1969. The nationalization was
deemed as a major step in achieving the socialistic pattern of society. In 1980 six
more banks were nationalized taking the total nationalized banks to twenty.

12.2 STRUCTURE OF SCHEDULE COMMERCIAL BANKS:

45
The composition of the board of directors of a scheduled commercial bank shall
consist of whole time chairman. Section 10A of the Banking Regulation Act, 1949
provides that not less than fifty-one per cent, of the total number of members of the
Board of directors of a banking company shall consist of persons, who shall have
special knowledge or practical experience in respect of one or more of the matters
including accountancy, agriculture and rural economy, banking, co-operation,
economics, finance, law, small-scale industry, or any other matter the special
knowledge of, and practical experience in, which would, in the opinion of the
Reserve Bank, be useful to the banking company. Out of the aforesaid number of
directors, not less than two shall be persons having special knowledge or practical
experience in respect of agriculture and rural economy, co-operation or small-scale
industry.

Besides the above the board of the scheduled bank shall consist of the directors
representing workmen and officer employees. The Reserve Bank of India and the
Central Government also has right to appoint their nominees into the board of the
banks.

Present scenario of the banks in India:

Banks are extremely useful and indispensable in the modern community. The
banks create the purchasing power in the form of bank notes, cheques bills, drafts
etc, transfers funds bring borrows and lenders together, encourage the habit of
saving among people.

The banks have played substantial role in the growth of Indian economy. From the
meager start in 1860 the banks have come to long way. At present in India there
are 20 nationalized banks, State bank of India and its seven Associate banks, 21
46
 old private sector banks and 8 new private sector banks. Besides them there are
more than 30 foreign banks either operating themselves or having their branches in
India. The statistical table hereunder shows the financial position of the banks as
on 31.03.2005.

12.3 STATE BANK OF INDIA AND ITS ASSOCIATES (RS IN

CRORES)
Name of Year of No. of Networth Deposits Advances Interest Net
bank incorporation Offices income NPA
ratio

State Bank 1966 833 1298 19038 12009 1741 1.61

of Bikaner
& Jaipur

State Bank 1941 943 1765 28930 15600 2325 0.61

of
Hyderabad

State Bank 1955*. 9161 24072 367048 202374 32428 2.65

of India

State Bank 1960 456 904 13807 9041 1110 1.00

of Indore

State Bank 1913 639 756 13585 8781 168 0.92

47
of Mysore

State Bank 1917 754 2045 26496 15359 2133 1.23

of Patiala

State Bank 1902 429 794 12613 6714 1132 1.40

of
Saurashtra

State Bank 1945 681 1130 24133 14848 2008 1.81

of
Travancore

* From 27th January 1921 to 30th June 1955 it was Imperial Bank of India, which
came about by merger of Bank of Bengal (2nd June 1806), Bank of Bombay (15th
April 1840) and Bank of Madras (1st July, 1843).

12.4 NATIONALIZED BANKS

Name of Year of No. of Networth Deposits Advances Interest Net
bank incorporation Offices income NPA
ratio

Allahabad 1865 2027 2328 40762 21151 3186 1.28

Bank

Andhra 1923 1159 1837 27551 17517 2273 0.28

Bank

Bank of 1908 2772 5628 81333 43400 6431 1.45

48
Baroda

Bank of 1906 2668 4465 78821 56013 6032 2.77

India

Bank of 1935 1330 1543 28844 13062 2368 2.15

Maharashtra

Canara 1906 2627 6109 96908 60421 7572 1.88

Bank

Central 1911 3239 3265 60752 27277 5205 2.98

Bank of
India

Corporation 1906 799 3054 27233 18546 2250 1.12

Bank

Dena Bank 1938 1072 1104 20096 11309 1725 5.23

Indian Bank 1907 1417 5936 34809 18360 2871 1.35

Indian 1937 1583 2575 44241 25205 3951 1.27

Overseas
Bank

Oriental 1943 1166 3327 47850 25299 3572 1.29

Bank of
Commerce

Punjab & 1908 787 440 14171 6322 1249 8.11

Sind Bank

49
Punjab 1895 4117 8161 103167 60413 8460 0.20
National
Bank

Syndicate 1925 1905 2199 46295 26729 3758 1.59

Bank

UCO Bank 1943 1801 2049 49470 27656 3547 2.93

Union Bank 1919 2140 3614 61831 40105 4970 2.64

of India

United 1950 1343 1957 25348 11390 2133 2.43

Bank of
India

Vijaya 1931 966 1590 25618 14336 2094 0.59

Bank

(Source: A profile on banks 2004-05, RBI))

The banks in India are operating through 55530 branches. All the banks together
had the net worth of Rs. 149385 crores as on 31st March, 2005. The banks also had
the deposit base of Rs. 1836985 crores and the advances of Rs. 1151113 crores
taking the total business to Rs. 2988098 crores. During the year 2004-05 the banks
had earned the interest income of Rs. 154761 crores. The average net NPA ratio of
the banks was also less 3.84% in year 2005.

Future is bright:

50
The Information Technology (IT) is becoming an important component of the
banking sector. The customers have become more demanding and they need value
added services from the banks. The foreign banks have raised the expectations of
the customers causing the bank to invest strongly on IT. The Indian banks have
started to meet the expectations of the people by opening both onsite and offsite
ATMs. Banks have also started telebanking, anytime/anywhere banking, mobile
banking and Internet banking to give the facilities to the customers. Banks have
also following the RBI sponsored technology programmes like mail messaging,
Electronic fund transfers (EFT), Structured Financial Messaging System (SFMS),
(Real Time Gross Settlement (RTGS), Centralized Fund Management System
(CFMS) and Negotiated Dealing System / Public Debt Office (NDS/PDO).

Banks have been given more teeth to tackle the Non performing assets by passing
the Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002. Under this Act, the banks can take over the assets of
the defaulters either by themselves or with the help of Court. The power is in
addition to the power to recover through the Debt Recovery Tribunal. The Asset
Reconstruction Companies have been formed which also take over the distress
assets from the banks.

Conclusive Remarks :- Banking Sector in India is likely to undergo a major

change.

51
 13. DIFFERENCE BETWEEN COMMERCIAL BANKS
AND RESERVE BANK ( CENTRAL BANK )

13.1 COMMERCIAL BANK

A Commercial Bank was established under Banking Regulation Act, 1949.

A commercial bank occupies a subordinate position in the banking structure
of a country.
 There is a large number or network of different commercial banks in a
country.
 It is a profit oriented financial institution.
A commercial bank cannot print currency notes.
 It creates credit money.
 It can be owned by the government or it may be privately owned.
A commercial bank perform certain primary and secondary functions.
 It cannot act as a clearing house.

52
  Individuals and institutions are the account holders of these banks.
 It can provide short term and medium term loans to the individuals and
industries.
 Only a few commercial banks are nationalized.

13.2 CENTRAL BANK

 The Central Bank of a country was established under a special statue. In

India RBI was established under the RBI Act of 1934.
 The central bank occupies a dominating position as it is the apex bank
among all the banks in the country.
 There can be only one central bank for the entire economy.
 It is a non-profit making financial institution.
 The central bank has the monopoly power to issue currency notes from Rs.2
and above.
 It is owned by the central government.
A central bank regulates money supply in the country by exercising its
control on commercial banks.
 It can act as clearing house.
 All commercial banks and the government are the account holders of this
bank.
 It can provide loans to schedule banks and financial institutions.

53
A central bank itself is a government bank..

14. COMMERCIAL BANKING VS. INVESTMENT

BANKING

14.1 COMMERCIAL BANKS

A commercial bank may legally take deposits for checking and savings accounts from
consumers. The federal government provides insurance guarantees on these deposits
through the Federal Deposit Insurance Corporation (the FDIC), on amounts up to
$100,000. To get FDIC guarantees, commercial banks must follow a myriad of
regulations.

The typical commercial banking process is fairly straightforward. You deposit money
into your bank, and the bank loans that money to consumers and companies in need of
capital (cash). You borrow to buy a house, finance a car, or finance an addition to your
home. Companies borrow to finance the growth of their company or meet immediate
cash needs. Companies that borrow from commercial banks can range in size from the
dry cleaner on the corner to a multinational conglomerate. The commercial bank

54
generates a profit by paying depositors a lower interest rate than the bank charges on
loans.

14.2 INVESTMENT BANKS

An investment bank operates differently. An investment bank does not have an

inventory of cash deposits to lend as a commercial bank does. In essence, an investment
bank acts as an intermediary, and matches sellers of stocks and bonds with buyers of
stocks and bonds.

Note, however, that companies use investment banks toward the same end as they use
commercial banks. If a company needs capital, it may get a loan from a bank, or it may
ask an investment bank to sell equity or debt (stocks or bonds). Because commercial
banks already have funds available from their depositors and an investment bank
typically does not, an I-bank must spend considerable time finding investors in order to
obtain capital for its client. (Note that as investment banks are increasingly seeking to
become "one-stop" financing sources, many I-banks have set aside billions of dollars of
their own capital that they can use to loan to clients directly.)

55
 15. MAJOR

ADVANTAGES OF COMMERCIAL BANKS

Significance of commercial Banks

The importance of a bank to modern economy, so as to enable them to develop, can be

stated as follow:

(i) The banks collect the savings of those people who can save and allocate them to
those who need it. These savings would have remained idle due to ignorance of the
people and due to the fact that they were in scattered and oddly small quantities. But
banks collect them and divide them in the portions as required by the different investors.

56
(ii) Banks preserve the financial resources of the country and it is expected of them that
they allocate them appropriately in the suitable and desirable manner.

(iii) They make available the means for sending funds from one place to another and do
this in cheap, safe and convenient manner.

(iv) Banks arrange for payments by changes, order or bearer, crossed and uncrossed,
which is the easiest and most convenient, Besides they also care for making such
payments as safe as possible.

(v) Banks also help their customers, in the task of preserving their precious possessions
intact and safe.

(vi) To advance money, the basis of modern industry and economy and essential for
financing the developmental process, is governed by banks.

(vii) It makes the monetary system elastic. Such elasticity is greatly desired in the
present economy, where the phase of economy goes on changing and with such
changes, demand for money is required. It is quite proper and convenient for the
government and R.B.I. to change its currency and credit policy frequently, This is done
by RBI, by changing the supply of money with the changing the supply of money with
the changing needs of the public.

57
Although traditionally, the main business of banks is acceptance of deposits and
lending, the banks have now spread their wings far and wide into many allied and even
unrelated activities.

Banking as an Ancestral Service

For the history of modern banking in India, a reference to the English Agency Houses
in the days of East India Company is necessary. Those agency houses, with no capital
of their own and depending entirely on deposits, were in fact trading firms carrying on
banking as a part of their business and vanished form the scene in the crises of 1829-32.
In the first half of the 19th century, the East India company established 3 banks The
Bank of Bengal in 1809, the Bank of Bombay in 1840 and the Bank of Madras in 1843.

The Bank of Bengal was given Charter with a capital of Rs.50 Lakhs. This bank was
given powers in different years as to:

(i) Rate of interest was limited to 12%.

(iii) Power to issue currency notes was given in 1824.

(iii) Power to open new branches given in 1839.

(iv) Power to deal in inland exchange was given in 1839.

58
 16. MAJOR

DISADVANTAGES OF COMMERCIAL BANKS

The Disadvanteges are Under:

1. Low performance: When the ownership is in public sector, the employs do not
work for profit and do not there performance and efficiency of the employs
remains poor.
2. Lack of competition: Competition is necessary for development and increasing
the production. Commercial banks has decreased the spirit of competition.
3. Favoritism: The management of commercial bank will provide jobs to there
favored persons because the political leaders have influence upon the state
authorities. Policy of partiality is adopted by the commercial banks.
4. Unbalanced distribution of credit: Agricultural sector is the major sector of the
economy. It should be given top priority in connection with distribution of credit.
After nationalization, balance distribution of credit has not been made.

59
 5. Encourage political monopoly: commercial banks will increase the influence of
politicians over fiscal and monitory structure of country. It will encourage
political monopoly in the country.
6. Increase the burden of the government: Government has to run many sectors of
the economy after commercial banks. There will be an extra burden on the
government. It is in the favor of the nation of that policy of the denationalization
should be adopted.
7. Decrease the process of industrialization: Privatization is necessary for increasing
the process of industrialization. When the banks will be nationalized, they will
not provide credit facility so actively for setting up industrial units in different
parts of the countr

17. RESEARCH METHODOLOGY

Research may be defined as the research for knowledge through an objective. It is a way
to systematically solve the research problem. It includes the various steps that are
generally adopted by a researcher. I have adopted the research design.

RESEARCH DESIGN

A Research design is the specification of the method and procedures for acquiring the
information needed.

DATA COLLECTION

There may be different types of information and data. Some of the information may be
published or unpublished, complete or uncomplete, reliable or unreliable, biased or
unbiased, primary or secondary data.

TOOLS FOR ANALYSIS

Primary data: Market survey of commercial banks.

60
 Secondary data: records , Websites.

This research is performed mainly by taking help of company’s records, annual reports,
official websites through internet.

18. CONCLUSION

a commercial bank is a bank that operates with a profit-earning goal ie a business bank
while a non-commercial bank is a financial institution that operates with the aim of
alleviating.. banking on the development of bank-customer relationships in the
value creation process.

Banks are financial institutions that can make or break an economy. Unsupervised and
uncontrolled behavior from banks can spell doom to the economy and for the customers
as well. Hence central banks...

61
banks are the regular banks that provide basic banking facilities to its customers. Some
of the facilities you can get from a commercial bank are:a. Checking/Current accountb.
Savings..

commercial banks or universal banks constitute twelve (12) financial institutions,

considered as one-stop commercial banks performing com-banking functions and non-
related banking activities

financial institutions that can make or break an economy. Unsupervised and

uncontrolled behavior from banks can spell doom to the economy and for the customers
as well. Hence central banks..

19. REFERENCES

WEBSITES

1 google.com

2 yahoo.com

3 Sribd.com

4 slideshare.net

BOOKS

Modern banking and technology

Commercial banking.

62
 MAGZINES,ARTICLES ,BLOGS , AND JOURNALS

Altunbas Y., Evans L. and Molyneux P. (2001), Bank ownership and efficiency,
Journal of

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66
 QUESTIONNAIRE

Dear sir/Madam,

Name :- ...............................................................................................................

Address :-................................................................................................................

................................................................................................................................

Gender

Male
Female

Household income level

Less than $25000

67
 $25001 - $50000
$50000 - $100000
More than $100000

1. How satisfied are you with the service you received?

excellent
very good
neutral
poor
very poor

*2. How likely are you to recommend our service to others Banks??
yes
maybe
no

*3. Which type of account do you have in commercial bank?

Saving Account
Current Account
Demat Account

*4. Which type of services you have ever used ?

NRI Banking
Forex Trade
Investment and Insurance
Cards

68
*5. How are the services of commercial banks
excellent
very good
neutral
poor
very poor

*6. Is the commercial banks are better than co-operative banks?

Yes
No

*7.Which service additionally you used of this following list ?

Online banking
Tele Banking
IVRs Banking
Mobile Banking
None of all

*8. Would you like any suggestions and improvement in commercial banking services ?

............................................................................................................................................

............................................................................................................................................

............................................................................................................................................

..................................................................

69
THE END

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