COMMERCIAL BANKS IN INDIA

COMMERCIAL BANKS IN INDIA

Commercial Banks are those profit seeking institutions which accept deposits from general public and advance money to individuals like household, entrepreneurs, businessmen etc. with the prime objective of earning profit in the form of interest, commission etc.Examples of commercial banks ICICI Bank, State Bank of India, Axis Bank, and HDFC BankINTRODUCTIONScheduled banks :- Banks which have been included in the Second Schedule of RBI Act 1934. They are categorized as follows:Public Sector Banks :- E.g.. SBI, PNB, Syndicate Bank, Union Bank of India etc.Private Sector Banks :- E.g.. ICICI Bank, IDBI Bank, HDFC Bank, AXIS Bank etc.Foreign Banks :- E.g.. Citi Bank, Standard Chartered Bank, Bank of Tokyo Ltd. etc.Non scheduled banks :- Banks which are not included in the Second Schedule of RBI Act 1934.

Classification of banksStructure of Banking System in IndiaCommercial Banks

Accepting depositsDemand or current account deposits- a depositor can withdraw it in part or in full at any time he likes without notice. It carries no interest.Fixed deposits- it can be done from 15 days to few years with high rate of interest which can be withdrawn at expiry of term.Saving deposits- it is for the purpose of small saving deposits by salaried people. These deposits carry less rate of interest and money can be withdrawn through cheques.

Primary functionsB. Advancing loansOverdraft facility- this facility is provided to the businessmen only even if the deposits are less, the transaction can be done . Banks charge interest on this facility.Loans by creating deposits- it can be done in following waysCash creditDemand loansShort term loansThe tendency of the commercial banks to make loans several times of the excess cash reserves kept by the bank is called creation of credit.Creation of credit means that the commercial banks by taking in deposits and making loans expand the money supply.Credit creation is the multiple expansion of banks demand deposits.

Do Banks Create Credit?9The process of 'Credit Creation' begins with banks lending money out of primary deposits. Primary deposits are those deposits which are deposited in banks. In fact banks cannot lend the entire primary deposits as they are required to maintain a certain proportion of primary deposits in the form of reserves with the RBI under RBI & Banking Regulation Act.

Process of Credit Creation

CREDIT CREATIONAdjusts assets balance between deposit liability and cash reserves.Cash reserve ratio remains same.

No credit control policy of central bank

AssumptionsCash Reserve Ratio (CRR)5.50% (w.e.f. 28/01/2012) -announced on 24/01/2012Decreased from 6.00% to 5.50% which was continuing since 24/04/2010 Bank M receives a cash deposit of $2000. This is the cash in hand with the bank which is its assets and this amount is also the liability of the bank by way of deposits it holds.

Given the reserve ratio of 10 % the bank holds $200 in reserves and lends $1800 to one of its customers.

EXAMPLE

ASSETSLIABILITIESReserves$2000Deposits$2000Reserves$200Deposits$2000Loans$1800This variation of $1800 is deposited by the customer in Bank NASSETSLIABILITIESReserves$1800Deposits$1800Reserves$180Deposits$1800Loans$1620This loan of $1620 is deposited by the customer of Bank N into Bank O.

Bank nBank mASSETSLIABILITIESReserves $1620Deposits$1620Reserves$162Deposits$1458Loans$1458This procedure goes on to other banks. Each bank in the sequence gets surplus reserves, lends and creates new demand deposits equal to 90 % of the prior bank.

BankRequired ReservesNew LoansNew DepositsM$200$1800$2000N$180$1620$1800O$162$1458$1620All other Banks$1458$13122$14580Total for the Banking System$2000$18000$20000Bank oThe multiple deposit creation model seems to indicate that the central bank of the country has complete control over the level of current deposits by setting the required reserve ratio.The fact is that all the four players i.e the central bank, commercial banks, depositors and borrowers are important in the determination of credit expansion.

ConclusionOverdraft facilitiesCash CreditDiscounting Bill of ExchangeMoney at callTerm LoansConsumer CreditMiscellaneous AdvancesDifferent Types of Commercial BankLoansAdvantagesBetter Banking ServicesExtensive servicesDecentralisation of risksUniform rate of interestBetter Cash managementBetter training facilitiesEasy and Economical transfer fundsBetter Investment of fundsEffective Central Bank controlContacts with the whole countryGreater public ConfidenceBranch Banking SystemDifficulties of management, supervision and controlLack of InitiativeMonopolistic TendenciesRegional ImbalancesContinuance of non profitable BranchesUnnecessary CompetitionExpensivenessLosses by Some Branches Affect others DisadvantageTHANK YOU