Commercial banks in india pptPresentation 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.
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.
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
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Withdrawn at expiry of term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small saving deposits salaried people less rate of interest money can be withdrawn through cheques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
Projects report preparation
Classification of banks
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.
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
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.
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
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.
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.
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.
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.
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.
See you in next class
Thank you for attending my class bye bye dear friends