2. Definition of 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
• All those institutions which are in the
business of banking are called financial
3. Definition contd...
• Commercial Banks are like other financial
institutions ( e.g.: 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.
5. Functions of Commercial Banks
• Accepting deposits
• Advancing Loans
• Discounting Bills of exchange
• Agency services
• General services
6. Functions of Commercial Banks
• Accepting Deposits
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
7. 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– Withdrawn at expiry of term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
8. Saving Bank Deposits
• small saving deposits
• salaried people
• less rate of interest
• money can be withdrawn
• through cheques
9. 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.
10. Two ways of advancing loans
By allowing an over draft facility cheques
are honoured even if deposits is less
facility for businessmen only interest on
11. Loans by creating a deposit
• Banks give loans to people by charging
• Bank asks for security
• Simply opens an account in name of
needy person and issues a cheque book
• Loans granted mostly for business
12. Discounting Bills of Exchange
• 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
• Now the seller can give this exchange bill
to a bank which will give him cash against
• Bank charges interest on it till one month
13. Agency Services
• Collection of bills, cheques
• Collection of dividends, interest, premium
• Purchase and sale of shares and
• Payment of insurance premiums
• Acts as trustee when nominated
14. General services
• Traveller’s cheques, bank draft
• Safe vaults for valuables
• Supplying trade information
• Economic surveys
• Projects report preparation
15. 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.
16. Credit Creation
• Banks create credit by creating cheque
money or deposit money which on account
of its free acceptability, circulates like legal
• This increases or decreases money in
circulation without increase or decrease in
currency or legal tender money.
17. 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 .
18. 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 depression
19. 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 crr, 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.
20. Limits of credit creation Continue.......
• supply or collateral security: larger and
better is availability of security against
loan, greater is extent of C.C.
• 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
21. 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
22. Nationalization of banks in India continues
• Nationalized banks were forced to follow
directions and guidelines issued by
• 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.
23. Nationalization of banks in India continues
• Indira Gandhi was the then P.M.
• 6 more banks were nationalized in 1980.
• National credit council was implementing
• In 1993 two banks were nationalized and
no. of nationalized banks is 19.
24. Objectives Of Nationalization
• to reduce concentration of economic powers with only
a few industrial magnets and to prevent monopolies.
• Mobilize resources even from backward and rural
• To prevent lopsided regional development
• 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
25. Objectives Of Nationalization Continues...
• 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.
• To fulfil credit needs of farmers: hardly
2.2% of funds were available for
26. Objectives Of Nationalization continues....
• 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.
27. 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.