functions and structure


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functions and structure

  1. 1. 1Commercial Banking –Functions and OtherImportant AspectsPrepared ByNILESH SEN
  2. 2. 2Learning Objectives…. Definition of Commercial Bank Types of Banks Functions of Commercial Banks Sources of Banks’ Income Investment Policy Understanding Balance Sheet of Banks Unit Banking Vs. Branch Banking CBs and Economic Development
  3. 3. Definition of Commercial Bank Banking Regulation Act, (BR Act), 1949.According to Section 5(c) of the BR Act, a bankingcompany is a company which transacts the businessof banking in India.‘ Further, Section 5(b) of the BR Act definesbanking as, accepting, for the purpose of lending orinvestment, of deposits of money from the public,repayable on demand or otherwise, andwithdrawable, by cheque, draft, order or otherwise.3
  4. 4. Contd… This definition points to the three primary activitiesof a commercial bank which distinguish it from theother financial institutions. These are: (i)maintaining deposit accounts including currentaccounts, (ii) issue and pay cheques, and (iii) collectcheques for the banks customers4
  5. 5. Types of Banks Broadly speaking, banks can be classified intocommercial banks and central bank. Commercial banks are those which providebanking services for profit. The central bank has the function of controllingcommercial banks and various other economicactivities. There are many types of commercial banks such asdeposit banks, industrial banks, savings banks,agricultural banks, exchange banks, andmiscellaneous banks. 5
  6. 6. Contd…6
  7. 7. Functions of CommercialBanks Commercial banks have to perform a variety offunctions which are common to both developed anddeveloping countries. These are known as ‘GeneralBanking’ functions of the commercial banks. The modern banks perform a variety of functions.These can be broadly divided into two categories: (a)Primary functions and (b) Secondary functions.7
  8. 8. Contd…8
  9. 9. Contd… Banks also perform certain Agency Functions forand on behalf of their customers. The agency servicesare of immense value to the people at large. Thevarious agency services rendered by banks are asfollows: Collection and Payment of Credit Instruments Purchase and Sale of Securities Collection of Dividends on Shares Acts as Correspondent Income-tax Consultancy 9
  10. 10. Contd… Execution of Standing Orders Acts as Trustee and ExecutorGeneral Utility Services Locker Facility Traveller’s Cheques and Credit Cards Letter of Credit Collection of Statistics Acting Referee Underwriting Securities and Merchant Banking10
  11. 11. Sources of Banks’ Income Interest on Loans Interest on Investments Discounts Commission, Brokerage, etc. Commercial banks also deal in foreign exchange.They sell demand drafts, issue letters of credit andhelp remittance of funds in foreign countries. Theyalso act as brokers in foreign exchange. Banks earnincome out of these operations.11
  12. 12. Investment Policy Liquidity Profitability Safety or Security Diversity Saleability of Securities Stability in the Value of Investments Principles of Tax-Exemption of Investments12
  13. 13. Understanding Balance Sheetof Banks The balance sheet of a commercial bank is astatement of its assets and liabilities. Assets are whatothers owe the bank, and what the bank owes othersconstitutes its liabilities. The business of a bank isreflected in its balance sheet and hence its financialposition as well. The balance sheet is issued usuallyat the end of every financial year of the bank.13
  14. 14. Contd…14
  15. 15. Unit Banking Vs. BranchBanking ‘Unit Banking’ means a system of banking underwhich banking services are provided by a singlebanking organisation. Such a bank has a single officeor place of work. It has its own governing body orboard of directors. It functions independently and isnot controlled by any other individual, firm or bodycorporate. It also does not control any other bank.15
  16. 16. Contd… Such banks can become member of the clearinghouse and also of the Banker’s Association. Unitbanking system originated and grew in the U.S.A.Different unit banks in the U.S.A. are linked witheach other and with other financial centres in thecountry through “correspondent banks16
  17. 17. Contd…Branch Banking System It means a system of banking in which a bankingorganisation works at more than one place. The mainplace of business is called head office and the otherplaces of business are called branches. The headoffice controls and co-ordinates the work atbranches. The day-to-day operations are performedby the branch manager as per the policies anddirections issued from time to time by the headoffice.17
  18. 18. CBs and EconomicDevelopment Accelerating the Rate of Capital Formation Provision of Finance and Credit Monetisation of Economy Innovations Implementation of Monetary Policy Encouragement to Right Type of Industries Development of Agriculture Regional Development Promote Industrial Development Promote Commercial Virtues18