Commercial BanksUnit – 2

Introduction Banks play a very useful and dynamic role in the economic life of every

modern economy.

Commercial banks are the institutions for accepting deposits from public and lending money to individuals as well as business organisations.

Commercial banks are registered under the Indian Companies Act, 1956 and governed by the Indian Banking Regulation Act, 1949.

Commercial banks in India has undergone major changes during post-independence period.

In the past, commercial banks were prepared to take only limited risks and function with limited responsibilities. From the days of such limited operations, commercial banks have emerged into the era of conventional and developmental banking.

Functions of Commercial Banks1. Acceptance of deposits Fixed deposits Saving bank deposits Current account deposits Recurring deposits

2. Lending of Money Loans to business and trade Loans to industry Loans to agriculture and allied activities Exports and imports trade Cash credit Overdraft Facility Discounting Bills of Exchange

3. Credit Creation

4. Agency Function

Collection of cheques, Payments for bills, Sale and purchase of securities, Trustee, executor and attorney, Dividend on Shares

5. Helping International Trade (Purchase & Sale of Foreign Exchange)

6. Supporting Economic Development

7. General Functions

Letters of credits, Draft facilities, travellers’ cheques, Underwriting, Guarantee for deferred payments, Locker facility, Business and statistical information

Important tools of modern banking are Automatic Telling Machine (ATM), Real Time Gross Settlement (RTGS) and the National Electronic Funds Transfer (NEFT).

An automated or automatic teller machine (ATM) also known as an automated banking machine (ABM)

India has two main electronic funds settlement systems for one to one transactions: the Real Time Gross Settlement (RTGS) and the National Electronic Funds Transfer (NEFT) systems.

Real Time Gross Settlement (RTGS): RTGS system is a funds transfer mechanism where transfer of money takes place from one bank to another on a ‘real time’ and on ‘gross’ basis. This is the fastest possible money transfer system through the banking channel.

Indian Financial System Code (IFSC) for RTGS and NEFT purposes. This is an eleven digit alphanumeric code and unique to each branch of bank.

The first four letters indicate the identity of the bank and remaining seven numerals indicate a single branch. This code is provided on the cheque books, which are required for transactions along with recipient’s account number.

National Electronic Fund Transfer (NEFT): The National Electronic Fund Transfer (NEFT) system is a nation-wide system that facilitates individuals, firms and corporates to electronically transfer funds from any bank branch to any individual, firm or corporate having an account with any other bank branch in the country.

Credit Creation Credit creation is the most important function of banking system in the

country. It can be defined as the process through which the commercial banks in the country jointly create the flow of money in the economic system.

Commercial banks create loans by giving loans. When a bank gives loan to someone – it opens an account against the name of the borrower who can withdraw money from bank issuing cheques.

When a commercial bank holds reserves over and above the statutory minimum, then, it is called as excess reserves. These excess reserves come to bank through cash deposits of public through which banks create credit.

Commercial banks create credit by accepting deposits and advancing loans.

Banks are the financial institutions dealing in money. They accept deposits at lower rate of interest anf lend that money to the needy parties at a higher rate of profit.

Primary Deposits: These are the deposits which the depositors put with the banks. Depositor is the creditor of the bank and bank is the debtor of the depositor.

Against primary deposits there are primary issues that are the claims issued by deficit spenders directly to surplus spenders.

Secondary Deposits: These are the deposits which arise on account of loans by the banks to the people.

Financial sector issue secondary claims on themselves to purchase the primary claims

The supply of money is directly altered by a change in bank deposits.

Limitations of Credit Creation Demand for Credit

Amount of cash

Central Bank’s Monetary Policy

External Drain

Banking habits, Banking System and collateral security

Commercial Banks in India At the time of Independence, India had a fairly well-developed banking system

with more than 645 Banks having more than 4800 branch offices. These banks although developed but they could not conform to social needs of the society.

These banks generally catered to the needs of industries and that too big ones. Other priority sectors like agriculture, small-scale industries, exports etc., were almost neglected.

To overcome these deficiencies, the Government announced the nationalisation of 14 major commercial banks with effect from July, 1969. Six more banks were nationalised in 1980. (Two banks were merged in 1993, so at present there are 19 nationalised banks).

Commercial banks in India include Scheduled banks(banks which have been included in the Second Schedule of RBI Act 1934)

List of Nationalised Banks1. Allahabad Bank

2. Andhra Bank

3. Bank of Baroda

4. Bank of India

5. Bank of Maharashtra

6. Canara Bank

7. Central Bank of India

8. Corporation Bank

9. Dena Bank

10. Indian Bank

11. Indian Overseas Bank

12. Oriental Bank of Commerce

13. Punjab and Sind Bank

14. Punjab National Bank

15. Syndicate Bank

16. UCO Bank

17. Union Bank of India

18. United Bank of India

19. Vijaya Bank

Nationalisation of Commercial Banks: Causes Concentration of Credit

Urban bias

Neglect of Agriculture Sector

Misuse of funds and illegal activities

Neglect of Priority Sector

Objectives of Nationalisation Removal of control by a few

To mobilise savings and channelize them for productive purposes in accordance with plans and priorities

To provide adequate credit for agriculture, small industry and export

To help in the most effective development of national resources so that the objectives of the Govt. could be realised with a greater degree of assurance.

To give a professional bent to management.

To create fresh opportunities for neglected and backward area’s new class of small entrepreneurs.

To provide adequate training as well as terms of services for bank staff.

As a whole to bring about right atmosphere for the development in the money market.

Evaluation of performance after nationalisation

Deposit Mobilisation

Year Amount

June 1969 ` 4650 Crores All Nationalised Banks

2001 ` 9,58,000 Crores All Scheduled Banks

Dec. 2006 ` 23,50,000 Crores 50% of National Income

2008 ` 31,97,000 Crores 80% of National Income

Dec. 2014 ` 79,30,000 Crores

Credit Expansion: Total credit has increased largely to the neglected sectors such as agriculture, SSIs, road and transport operators, retail trade, small businesses and self employed.

Branch opening in rural and unbanked areas: In 1969, there was just 22% bank offices in rural areas which has improve to 38% in June 2013.

Lead Bank Scheme: Under this scheme, all the districts of the country are allotted to some new bank or the other. One such bank in any district helps its development by opening new branches and by providing maximum credit facilities.

Year Amount

June 1969 ` 3399 Crores

June 2006 ` 10,93,000 Crores

June 2008 ` 23,62,000 Crores

April 2014 ` 60,00,000 Crores

March 2014 Bank lending for SSI have gone up to 36%

Branch Expansion: In post nationalisation period, there has been a rapid expansion of bank branches, mostly in rural areas.

Year No. of Branches Population per Branch

June 1969 8262 branches 65,000 people

2006 69,616 branches 16,000 people

2008 76,885 branches 15,000 people

2013 1,11,723 branches 12,000 people

Failure Most of the rural branches are running at a loss due to high overheads and

prevalence of barter system in rural India.

Although the commercial banks have spread their wings to every corner of the country, but considering the huge population of India, their growth in numerical terms in insufficient. This is specially so with regard to rural areas who have just 38 per cent of the bank branches but where more than 70 per cent of the population of the country reside.

There are regional imbalances in the coverage of bank offices. Only few states have well developed banking facilities : Arunachal Pradesh, Jammu and Kashmir, Uttaranchal, Manipur, Tripura on an average have lesser number of banks compared to other states.

Bad and doubtful debts of scheduled commercial banks, called non-performing assets (NPAs) have swelled over a period of time. Gross NPAs as a percentage of Gross Advances were more than 10 percent till 2001-02, but due to stringent credit norms and improved financial health of the economy the gross NPAs have fallen. As a percentage of gross advances, they have fallen from 10.5 per cent in 2001-02 to 3.6 per cent in 2012-13.

The absolute profits of the banks are rising but the profitability ratio (in terms of return on investment, return on equity) has not improved much. Six factors have been identified for declining trends in profitability. These are

(i) lower interest on Government borrowings from banks

(ii) subsidisation of credit to priority sector

(iii) rapid branch expansion

(iv) locking up of funds in low-term low yielding securities resulting from directed credit programmes of banks

(v) lack of competition

(vi) Increasing expenditure resulting from over staffing and mushrooming of branches some of which are non-viable

The growth of advances to the priority sector is slow.

In relation to deposit mobilisation, commercial banks are facing challenges from NBFI such as mutual funds, insurance companies and leasing & investment companies.

Major weakness of nationalised bank is its failure to sustain the desired credit pattern and fill in credit gaps in different sectors.

The post nationalisation period has witnessed a widening gap between promise and performance.

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