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Commercial banks in india ppt Commercial banks in india ppt Presentation Transcript

  • Commercial Banks in India Meaning of commercial banks, functions, credit creation, role in economic development Warm Welcome to my Class Prof Hastimal Sagara
  • Crowther’s Definition banking
    • “ Bank is an institution which collects money from those who have in spare or who are saving it out of their income; and lend this money out to those who require it.”
    • All those institutions which are in the business of banking are called financial institutions.
  • Definition
    • Commercial Banks are like other financial institutions ( eg. money lenders, indigenous bankers, cooperative societies, agricultural and industrial credit institutions) which are in the business of lending and borrowing of money or credit.
  • Yes!!!
    • Commercial Banks are the most important credit institutions in the country in the business of lending and borrowing of money and credit creation.
  • Functions of commercial banks
    • A) Accepting deposits
    • B) Advancing Loans
    • C) Discounting Bills of exchange
    • D) Agency services
    • E) General services
  • Functions of C. B.
    • A) Accepting Deposits
    • i) Demand 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
    • Only small savings of businessmen
    • Cheque facilities
  • ii) Fixed Deposits or Time Deposits
    • Fixed deposits for 15days to few years
    • Withdrawn at expiry of term
    • High rate of interest
    • A source of investment
  • iii) Saving Bank Deposits
    • small saving deposits salaried people less rate of interest money can be withdrawn through cheques
  • B) Advancing Loans
    • This is the most important means of earnings for the banks
    • Giving loans to businessmen
    • But it keeps a fine balance between deposits and loans
    • Banks profitability depends on this as well.
  • Two ways of advancing loans
    • I) By allowing an over draft facility
    • cheques are honoured even if deposits is less
    • facility for businessmen only
    • interest on overdraft amount
  • II) Loans by creating a deposit
    • Banks give loans to people by charging interest
    • Bank asks for security
    • Simply opens an account in name of needy person and issues a cheque book to transact
    • Loans granted mostly for business
  • C) Discounting Bills of Exchange or Hundies
    • If a seller sells some goods to a buyer who does not pay in cash. But the seller draws a bill of exchange which is signed by buyer.
    • There is maturity or payment period, say one month
    • Now the seller can give this hundy to a bank which will give him cash against it
    • Bank charges interest on it till one month.
  • D) Agency Services
    • Collection of bills, cheques
    • Collection of dividends, interest, premium
    • Purchase and sale of shares and debentures
    • Payment of insurance premiums
    • Acts as trustee when nominated
  • E) General services
    • Traveller’s cheques, bank draft
    • Safe vaults for valuables
    • Supplying trade information
    • Economic surveys
    • Projects report preparation
  • Classification of banks
    • Central bank
    • Commercial Banks : short term credit
    • Industrial Banks: long term capital needs
    • Exchange Banks: Finance export import
    • Land Mortgage or land Development Bank: long term credit for agriculture
    • Cooperative banks: small saving as joint effort of members, low interest rate, registered under Cooperative Society’s Acts.
  • Credit Creation
    • Banks create credit by creating cheque money or deposit money which on account of its free acceptability, circulates like legal tender money.
    • This increases or decreases money in circulation without increase or decrease in currency or legal tender money.
  • Credit Creation By Banks
    • Definition:
    • It is the process of creation of credit by commercial banks. More use of DD and cheques is CC and not cash.
    • Cheques and deposit money are as good as legal tender money on account of their acceptability by the general public .
  • Assumptions of credit creation :
    • Adjusts assets balance between deposit liability and cash reserves
    • Cash reserve ratio remains same
    • There should be sound banking system
    • No credit control policy of central bank
    • Business is normal, no severe depression
  • Limits of credit creation
    • 1) Amount of cash of banks. Greater is amount, larger is its capacity for c.c.
    • 2) Cash reserve ratio: lower is csr, higher is credit creation capacity
    • 3) External drain: larger is amount of money withdrawn from bank, lower is its cc.
    • 4)extent of borrowing of funds by business. More c.c. when business is prospering.
  • Continu.
    • 5) supply or collateral security: larger and better is availability of security against loan, greater is extent of C.C.
    • 6) Banking habit of people: if people use more of cash and less of cheque then CC is not possible.
    • Monetary policy of central bank: central bank can influence CC by credit control tools
  • Nationalization of banks in India
    • What is Nationalization of banks
    • The process of transferring ownership and operational rights of a bank from private or trusts to the government of the country.
    • In India also, 14 leading banks were nationalized on July 18, 1969.
    • Each one’s deposits were more than Rs 50 crores.
    • Their share in total deposits and advances were almost two third of all scheduled banks in nation
  • continues
    • Nationalized banks were forced to follow directions and guidelines issued by government.
    • At that time there were more than 645 banks having more than 4800 branches.
    • They were serving only urban areas, big industrial houses at the cost of rural areas and small industries.
  • continues
    • Indira Gandhi was the then P.M.
    • 6 more banks were nationalized in 1980.
    • National credit council was implementing body.
    • In 1993 two banks were nationalized and no. of nationalized banks is 19.
  • Objectives of nationalization
    • 1. to reduce concentration of economic powers with only a few industrial magnets and to prevent monopolies.
    • 2)Mobilize resources even from backward and rural areas
    • 3)To prevent lopsided regional development
    • 4)To prevent corruption and misuse of firms: the trustees were only benefiting from huge resources and it was at the cost of general development in the country.
  • Continues.
    • 5)To provide aid to the poor, small artisans and small scale industries. Small scale industries contributed 40% of industrial output but received only 4% of bank funds.
    • 6) To fulfill credit needs of farmers: hardly 2.2% of funds were available for agriculture.
  • continues
    • 7) To finance government’s development projects; specially five year plans
    • To prevent giving loans to those firms were not existing in the priority list.
    • To prevent loan/advances to black marketers and hoarders.
  • Working or commercial banks after nationalization
    • Expansion of Branches:
    • no. of branches increased from 8262 in 1969 to 66,514 in 2003.
    • Population per bank has reduced from 55,000 in 1969 to 16000 in 2003.
    • 22% of rural areas were covered in 1969 by banks and increased to 50% in 2003.
  • Deposit Mobilisation
    • Rs 4665 crores in 1969 to 12,80,000 crores in 2003.
    • Bank Lending: Rs 3399 crores to 7,29,000 crores in 2003.
    • Priority area lending to agriculture, small scale industries and small retail trade increased from 14% to 42% in 1969-2003 period .
  • Promotion of new entrepreneurship
    • Banks have been actively financing IRDP, NREP, TRYSEM, JRY, NRY.
    • The banks have been lending to the high priority projects in the economy.
  • End
    • See you in next class
    Thank you for attending my class bye bye dear friends