COMMERCIAL BANKS

Description
FULL PROJECT

PROJECT ON COMMERCIAL BANKS SHRI PARMESHWARI DURGADUTT TIBERAWALA LIONS CLUB OF JUHU COLLEGE BATCHLOR OF COMMERCE BANKING AND INSURANCE (THIRD YEAR)

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PROJECT ON COMMERCIAL BANKS SUBMITTED BY MILIND V KEER ROLL NO :- 319 SHRI PARMESHWARI DURGADUTT TIBERAWALA LIONS CLUB OF JUHU COLLEGE BATCHLOR OF COMMERCE BANKING AND INSURANCE (THIRD YEAR)

ACKNOWLEDGEMENT
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I Mr Milind Vijay Keer 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- Shri Parmeshwari Durgadutt Tiberewala Lions Club of Juhu of Commerce & Economics, the Principal of our college Ms. Ishwari 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 Ms. Ishwari 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.

DECLARATION
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I, Mr. DILIP CHOUDHARY DURGADUTT TIBREWALA

IN T.Y.B.COM ( BANKING JUHU COLLEGE THAT OF I IN

AND ARTS, HAVE THE

INSURANCE), ROLL NO: TBI 319 OF SMT PARMESHWARIDEVI LIONS COMMERCE AND SCIENCE, HEREBY COMPLETED THE PROJECT ACADEMIC YEAR 2011 – 12 THAT INFORMATION OF MY PROJECT SECONDARY OF COTHE GUIDANCE DECLARE

ON “COMMERCIAL BANK”

I HEREBY DECLARE SOURCE. I

IS BASED ON REFERENCES PRIMARY SOURCE AND HAVE WORKED UNDER TRUE AND FACT

ORDINATOR AND OTHER PROFESSORS. THE INFORMATION PROVIDED IN THIS PROJECT IS MY SENIORS. INFORMATION. I HOPE MY PROJECT WILL FULFILL THE OBJECTIVE AND EXPECTATIONS OF

Datelace :- MUMBAI

Signature of a student Milind V. Kee

CERTIFICATE

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I,Miss. NANDA INDULKAR co-ordinator ofBanking and Insurance hereby certify that Mr.DILIP CHOUDHARY of DURGADUTT TIBREWALA LIONS SMT PARMESHWARIDEVI COLLEGE OF ARTS, JUHU

COMMERCE AND SCIENCE studying in T.Y.B.B.I (Banking And Insurance) has completed his project on year 2011 – 12. “BANK OF MAHARASHTRA”in the academic

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

Signature of Principal

College Seal

Signature of Co-ordinator

Signature of Project Guide

Signature of External Examiner

Date: Place: Mumbai. INDEX
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CHAP NAME

PARTICULAR INTRODUCTION ROLE AND FUNCTIONS OF COMMERCIAL BANKS SPECIAL ROLE OF COMMERCIAL BANKS INVESTMENT OF COMMERCIAL BANKS COMMERCIAL BANKS AND NATIONALISED BANKS ROLE OF COMMERCIAL BANKS IN ECONOMIC DEVELOPMENT RBI PENALISES COMMERCIAL BANKS COMMERCIAL BANK AND MICROFINANCE TAX REFORM AFFECT COMMERCIAL BANKS COMMERCIAL BANKS SERVICES PROVIDED TO THEIR CUSTOMERS EVALUATION AND STRUCTURE OF COMMERCIAL BANKS IN INDIA DIFFERENCE BETWEEN COMMERCIAL BANKS AND RESERVE BANK DIFFERENCE BETWEEN COMMERCIAL BANKING AND INVESTMENT BANKING MAJOR ADVANTAGES OF COMMERCIAL BANKS MAJOR DISADVANTAGES OF COMMERCIAL BANKS
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PAGE. NO

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16.

8-10 13-26 17-20 21-26 27-27 28-28 29-30 31-35 36-37 38-43 44-52 53-54 55-56 57-59 60-60

DEFINATION AND MEANING OF COMMERCIAL BANKS 11-12

17. 18. 19. 20. 21.

RESEARCH METHODOLOGY CONCLUSION REFRENCES BIBILOGRAPHY QUESTIONNAIRE

61- 61 62- 62 63-64 65-67 69-70

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1. 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 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
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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.

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
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Bank Rate 6% (even in Oct 2005) Prime Lending Rate (PLR) in between 10.5% -11.50% CRR 4.50% SLR 25%

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 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..

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2.2 MEANING 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.
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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.

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

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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.

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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

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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. f) Collecting and supplying business information;
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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.

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
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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, 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
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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 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,
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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 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
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(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 200203. 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. 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
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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 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
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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. The behavior of major balance sheet indicators show that a divergent during 200405. 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 netowned 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
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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 (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.

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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). (h) Growth of substitutes.

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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 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

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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 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.

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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. “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.
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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
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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 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.

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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. 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 Profit Risk diversification External Factor Large microenterpise or low-income market Competition
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Excess liquidity Image Cross-selling opportunities Bank leadership Social responsibility Public relations Compatibility with bank strategy

Trend or fad Regulations Government or donor initiative Market pressure on margins Desertion of traditional clients

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.
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networks’ exploitation and management. 3. Systems for electronic transmission of transactions with institutions and/or clients. 4. Pension funds management. 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.
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15. Financial trusts fiduciary. 16. Transportation and/or custody of money and securities, including transport service of mailing and financial 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,
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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 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.
35

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:

36

i) Current deposit ii) Saving deposit 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

37

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. 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
38

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 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
39

loans in comparison to cash credit. A loan is generally granted against the security 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
40

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

41

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 moneychanger, 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 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
42

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 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
43

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:
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
44

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 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.
45

12.3 STATE BANK OF INDIA AND ITS ASSOCIATES CRORES)
Name of bank State Bank of Bikaner & Jaipur State Bank of Hyderabad State Bank of India State Bank of Indore State Bank of Mysore State Bank of Patiala State Bank of Saurashtra State Bank 1945 681 1130
46

(RS IN
Net NPA 1.61

Year of incorporatio n 1966

No. of Office s 833

Networt h 1298

Deposit s 19038

Advance s 12009

Interes t 1741

income ratio

1941

943

1765

28930

15600

2325

0.61

1955*. 1960 1913 1917 1902

9161 456 639 754 429

24072 904 756 2045 794

367048 13807 13585 26496 12613

202374 9041 8781 15359 6714

32428 1110 168 2133 1132

2.65 1.00 0.92 1.23 1.40

24133

14848

2008

1.81

of Travancor e * 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 bank Year of incorporatio n Allahabad Bank Andhra Bank Bank of Baroda Bank of India Bank of Maharashtr a Canara Bank
47

No. of Office s 2027 1159 2772 2668 1330

Networt h

Deposit s

Advance Interes s t incom e

Net NP A ratio 1.28 0.28 1.45 2.77 2.15

1865 1923 1908 1906 1935

2328 1837 5628 4465 1543

40762 27551 81333 78821 28844

21151 17517 43400 56013 13062

3186 2273 6431 6032 2368

1906

2627

6109

96908

60421

7572

1.88

Central Bank of India Corporatio n Bank Dena Bank Indian Bank Indian Overseas Bank Oriental Bank of Commerce Punjab & Sind Bank Punjab National Bank Syndicate Bank UCO Bank Union Bank of India United

1911

3239

3265

60752

27277

5205

2.98

1906 1938 1907 1937

799 1072 1417 1583

3054 1104 5936 2575

27233 20096 34809 44241

18546 11309 18360 25205

2250 1725 2871 3951

1.12 5.23 1.35 1.27

1943

1166

3327

47850

25299

3572

1.29

1908 1895

787 4117

440 8161

14171 103167

6322 60413

1249 8460

8.11 0.20

1925 1943 1919

1905 1801 2140

2199 2049 3614

46295 49470 61831

26729 27656 40105

3758 3547 4970

1.59 2.93 2.64

1950

1343

1957
48

25348

11390

2133

2.43

Bank of India Vijaya Bank (Source: A profile on banks 2004-05, RBI)) 1931 966 1590 25618 14336 2094 0.59

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: 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).

49

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.

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

50

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. • 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

51

• 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. A central bank itself is a government bank..

14. COMMERCIAL BANKING VS. INVESTMENT BANKING
52

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 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
53

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.)

15. MAJOR ADVANTAGES OF COMMERCIAL BANKS
54

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.

(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.

55

(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.

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:

56

(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.

16. MAJOR DISADVANTAGES OF COMMERCIAL BANKS
The Disadvanteges are Under:

57

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. 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.

3.

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.
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.

58

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

18. CONCLUSION

59

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...

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 nonrelated 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
60

2 3 4

yahoo.com Sribd.com slideshare.net

BOOKS
Modern banking and technology Commercial banking.

MAGZINES,ARTICLES ,BLOGS , AND JOURNALS

Altunbas Y., Evans L. and Molyneux P. (2001), Bank ownership and efficiency, Journal of Money, Credit, and Banking, 33 (4), 926-954. Angelini P., Di Salvo R. and Ferri G. (1998), Availability and cost of credit for small businesses: Customer relationships and credit cooperatives, Journal of Banking and Finance, 22, 925-954.

Banerjee A. V., Besley T. and Guinanne T. W. (1994), The Neighbor’s Keeper: The Design of a Credit Cooperative with Theory and a Test, Quarterly Journal of Economics, 109 (2), 491515.
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Berger A. N., Miller N. H., Petersen M. A., Rajan R. G. and Stein J. C. (2001), Does Function Follow Organizational Form? Evidence From the Lending Practices of Large and Small Banks, manuscript.

20. BIBILOGRAPHY
Jensen M. C. and Meckling W. H. (1979), Rights and Production Functions: An Application to Labour Managed Firms and Codetermination, Journal of Business, 52 (4), 469506.

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Jondrow J., Lovell C. A. K., Materov I. S. and Schmidt P. (1982), On the estimation of technical inefficiency in the stochastic frontier production function model, Journal of Econometrics, 19, 233-238. Hansmann H. (1988), Ownership of the firm, Journal of Law, Economics and Organization, 4, 267-304. Hansmann H. (1996), The ownership of enterprise, Cambridge (MA), Harvard University Press. Holmstrom B. (1999), The firm as a subeconomy, Journal of Law, Economics and Organization, 15 (1), 74-102. Holmstrom B. and Milgrom P. (1994), The firm as an incentive system, American Economic Review, 84 (4), 972-991. Lovell C. A. K. (1993), Production frontiers and production efficiency, in Fried H. O., Lovell C. A. K. and Schmidt S. (eds.), The measurement of productive efficiency, Oxford, Oxford University Press. Masten S. E. (2002), Modern Evidence on the Firm, American Economic Review Papers and Proceedings, 92 (2), 428-432. 17

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Modigliani F. and Miller M. (1958), The cost of capital, corporation finance, and the theory of investment, American Economic Review, 261-297. Pittatore S. and Turati G. (2000), A Map of Property Rights in Italy and the Case of Cooperatives: an Empirical Analysis of Hansmann’s Theory, Economic Analysis, 3 (1), 23-48. Presti G. (1998), Il governo delle banche popolari e di credito cooperativo, Banca Impresa Società, 17 (1), 147-181. Rajan R. G. (1998), The Past and Future of Commercial Banking Viewed through an Incomplete Contract Lens, Journal of Money, Credit, and Banking, 30 (3), 524-550. Rasmusen E. (1988), Mutual banks and stock banks, Journal of Law and Economics, 31, 395421. Sealey C. W. and Lindley J. T. (1977), Inputs, Outputs and a Theory of Production and Cost at Depository Financial Institutions, Journal of Finance, 32, 1251-1266. Shelanski H. A. and Klein P. G. (1995), Empirical research in transaction cost economics: A review and assessment, Journal of Law, Economics, and Organization, 11 (2), 335361. Williamson O. E. (2000), The New Institutional Economics: Taking Stock, Looking Ahead, Journal of Economic Literature, 38, 595-613.
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Henderson, Yolanda K. ' m e Taxation of Banks: Particular Privileges or Objectional Burdens?' New England Economic Review, May/June 1987, pp. 3-18. “Building Inclusive Financial Sector for Development.” The Blue Book. Federal Reserve Bank of Boston,

QUESTIONNAIRE Dear sir/Madam, Name :...............................................................................................................

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

Gender

65

Male Female Household income level Less than $25000 $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

66

*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

*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
67

*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 ? ............................................................................................................................................ ............................................................................................................................................ ............................................................................................................................................ .................................................................. THE END

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