COMMERCIAL BANKING

BANKING

Under Banking Regulation Act,1949 ,

“ banking includes accepting deposits

from public, for the purpose of lending

or investment; and repayable on demand

or otherwise and withdrawable by check ,

draft, order or otherwise .”

UNIT BANKING

It consists of provision of banking services by a single institution .The size as well as area of operation are small. The unit banks may have branches within a limited area.

Merits:• Adoption to local conditions • Mobilization of deposits and deploying them for local

needs• Developing a friendly image• Serves local needs in an effective manner• Local resources put to local use

BRANCH BANKING In branch banking system a typical commercial bank

is a large institution having a large number of branches scattered all over the country .

The branches may be located in the same city ,state or across other states within the nation or overseas.

The branches are controlled from one location referred to as head office.

Merits:• Facilitates allocation or transfer of savings to the most

efficient use• Division of labour• Provision of remittance facilities• Spread of risks

• Leads to uniform structure of interest rates • Banks need not specialize in any particular

area or industry• Fosters trader-customer contacts across the

nation as well as cross borders Demerits:• Absence of delegation of powers• Delays• Loss of initiative• Lack of familiarity with local conditions and

special problems of the region• Local savings get transferred elsewhere

RETAIL BANKING • It refers to the mobilization of deposits from individuals

and lending to small business and in retail loan markets .

• It consists of large volumes of low value transactions. • It includes a comprehensive range of financial

products viz., deposit products ,residential mortgage , credit cards , auto finance , personal loans ,consumer durable loans ,loans against equity shares , loans for subscribing to Initial Public Offers , debit cards , bill payment services , mutual funds , investment advisory services.

• These products provide an opportunity for banks to diversify the asset portfolio with high profitability and relatively lower NPA s.

• Net banking ,phone banking, mobile banking, ATMs and bill payments are the new facilities that the banks are using to lure the customers and also to reduce their total operating cost.

WHOLESALE BANKING

• It refers to dealing with large customers often multinational companies , government or government enterprises .

• The wholesale banks deal in large valued transactions , usually in small volumes .

• They draw funds from and lend funds to business .• It also includes transactions which the banks conduct

with each other via inter bank markets separate from customers .

• It is domestic as well as international .

The practices basic to wholesale banking are :

• Interbank markets in domestic and foreign currencies

• Issue of certificates of deposit in domestic and foreign currencies

• Lending by means of term loans ( roll over credits)

• Wholesale banking practices such as loan syndication; rollover credits and floating rate of loans have filtered through retail end .

UNIVERSAL BANKING

• Universal banks are considered as one-stop financial supermarket offering broad range of services .in a narrow sense, universal banking denotes combination of banking and insurance and investment activities .universal banks are those banks that offer a wide range of financial services , beyond commercial banking, insurance and investment banking etc.

• ICICI was the first bank to turn itself into universal bank.

Merits :

• Greater economic efficiency in the form of

• lower cost ,

• higher out put

• better product

Demerits :

• Chances of gaining monopoly , which would have undesirable consequences on economic efficiency

• Conflict of interest

BANKING REGULATION ACT ,1949

• License from RBI – establish; expand; close; shift .

• Closer look over the over all management of banks – appoint / terminate the chairman

• Exercise control over advances given by banks

• Can put restriction on any transaction

• Can inspect books of accounts

RESERVE BANK OF INDIA ACT ,1934

Cash Reserve Ratio Sec 42 Every bank has to maintain an average daily balance with RBI 3% to15 % of Net Demand and Time Liabilities.

The regulator fixes this rate taking into consideration:• Macro economic condition• Money supply in the market

CRR earlier was 8.25 % , was brought down to 5% and now a days it is 7 %.

CRR is maintained in the form of :• Approved assets• Deposit with RBI• Cash balance in currency chest kept in bank- deemed to be

deposited in RBI

Yield :

• Apex bank provides a yield of 6% on CRR maintained i.e.

• No yield for first 3% CRR

• 6 % yield if CRR is greater than 3 %.

• This is payable quarterly

Penalty:

• Incase of default a penalty is charged on CRR generally greater than bank rate.

Statutory Liquidity Ratio Section 24 (2A)

• In addition to CRR bank has to maintain statutory reserve in the form of :

– Cash– Gold– Approved securities– Balance in the form of current account

This is to control money supply for credit purpose ; increase bank investment in government in government securities ; ensure solvency of banks.

• Earlier this SLR was 38.5 % and now a days it is 25 % of Net Demand and Time Liabilities.

Yield :

• Investment in selected portfolio earns large yields for the bank.

Penalty:

• Penalty is charged at the rate of 3% p.a. in case of default .

• 5 % in case of continuous default.

DEMAND LIABILITIES

Current depositSavings DepositMargin against LC/GuaranteeRecurring DepositBalance of cash credit account

TIME LIABILITIES

Fixed DepositsCash CertificateIndian Development BondsStaff security deposits

Net Demand and Time Liabilities

Excludes :

• Liabilities of overseas branches

• Interbank liabilities

• Non resident deposits

• Vostro account balance

PRUDENTIAL NORMS

• Income recognition not on accrual basis but on realization basis

• Asset classification : standard ; sub standard – till 12 months ; doubtful – after 12 months ; • Capital adequacy :desirable 10%of the risk (credit risk) weighted assets as base capital• NPAs should be less than 3% of net advances

• Provision of bad debts for doubtful assets Standard Assets: 1% Sub Standard Assets: Secured -10% Unsecured - 20% Doubtful Assets: Secured - up to 12 months - 20% 12-36 months - 30% more than 36 months - 100% Unsecured -100%• Loss Assets: value of security goes below

10% of outstanding liabilities. Provision required is 100%

USE OF FUNDS

• 8.25% CRR

• 25% SLR

• 40% Priority Sector Lending :

agriculture ,SSE, artisans ;self

employment

• 26.75% Others

THE INDIAN BANKING SYSTEM

PublicSectorBanks

Private SectorBanks

Cooperative Banks

DevelopmentBanks

• SBI and its 7associates

*19 nationalized banks

*Regional Rural banks sponsored by Public sector banks

*New Generation pvt Sector banks

*Foreign banks

*Scheduled Cooperative Banks

*Non- scheduled Banks

*Central CB

*State CB

*Primary Agricultural Societies

*Urban CB

* Industrial Finance Corporation of India (IFCI)

*Industrial Investment Bank of India (IIBI)

*SIDBI*NABARD *Exim Bank*National Housing Bank (NHB)

THE INDIAN BANKING SYSTEM

The banking system in India has three tiers : • scheduled commercial banks; • the regional rural banks and • the cooperative and special purpose banks .

There are approximately :• 80 scheduled commercial banks Indian and foreign; • 200 regional rural banks and • more than 350 central cooperative banks , • 20 land development banks and • a number of primary agricultural credit societies .

• In terms of business, the public sector banks namely the State Bank of India and the nationalized banks dominate the banking sector.

• Scheduled commercial banks constitute those banks which have been included in the 2nd Schedule of the RBI Act 1934.

These banks enjoy certain privileges such as:• free concessional remittances facilities • financial accommodation from RBI • minimum cash reserve ratio to be kept with RBI

FUNCTIONS OF COMMERCIAL BANK

BASIC SERVICES

• To change cash for bank deposits and bank deposits for cash .

• The deposit with bank vary in terms of maturity ,interest payment ; cheque facility and insurability. Demand Deposits / Current Deposit ; Time Deposit – Savings and Fixed .

• To transfer bank deposits between individuals and /or companies

• To exchange deposits for bills of exchange, government bonds ,the secured and unsecured promises of trade and industrial units

• Credit extended in the form of cash credit ; overdraft; demand loans ;purchase or discounting of commercial bills and instalment or hire purchase credit.

• To underwrite capital issues

FINANCIALSERVICES

• Advice in portfolio management /investment counseling

• Facilitate merger and acquisition

• Management and distribution of mutual funds

• Sell insurance products

FIDUCIARY SERVICES

• Manage employee pension

• Act as trustees and manage the asset for others

MARKETISATION OF BANKING

The rapid expansion of Off-Balance Sheet activities of banks consisting of :

• commitments (unused overdraft facilities and note issuance facilities ) which may require banks to advance funds and acquire a credit exposure at some future date.

• providing guarantees and bankers acceptances, this substitutes banks credit rating for that of the borrowing firm

( this remains an off-balance sheet exposure for the bank as long as the acceptance is not discounted)

• entry of banks into forward contracts in the markets in foreign exchange ,interest rates and stock market

• banks engaging in securities underwriting

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