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 it.”
• All those institutions which are in the business of banking
are called financial institutions.
• 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.
3. Functions of Commercial Banks
• Accepting deposits.
• Advancing Loans.
• Discounting Bills of exchange.
• Agency services.
• General services.
4. Accepting Deposits
Demand or Current Account Deposits:-
A depositor can withdraw it in part or in full at any time he likes without notice carries no
interest.
Only small savings of businessmen Cheque facilities.
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Withdrawn at expiry of term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
Saving Bank Deposits:-
small saving deposits
salaried people
less rate of interest
money can be withdrawn
through cheques
5. Advancing Loans
o This is the most important means of earnings for the banks
o Giving loans to businessmen
o But it keeps a fine balance between deposits and loans
o Banks profitability depends on this as well.
Two ways of advancing loans:-
o By allowing an over draft facility cheques are honoured even if deposits is less.
o Facility for businessmen only interest on overdraft amount.
Loans by creating a deposit:-
o Banks give loans to people by charging interest
o Bank asks for security
o Simply opens an account in name of needy person and issues a cheque book to transact
o Loans granted mostly for business
6. 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 one month
• Now the seller can give this exchange bill to a bank which
will give him cash against it
• Bank charges interest on it till one month
7. 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
8. General Services
• Traveller’s cheques, bank draft
• Safe vaults for valuables
• Supplying trade information
• Economic surveys
• Projects report preparation
9. 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.
10. 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.
11. 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.
12. Assumptions Of Credit Creation:
oAdjusts assets balance between deposit liability and cash
reserves
oCash reserve ratio remains same
oThere should be sound banking system
oNo credit control policy of central bank
oBusiness is normal, no depression
13. 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.
14. Nationalization Of Banks In India
What is Nationalization of banks ?
o The process of transferring ownership and operational rights of a bank from private or trusts to
the government of the country.
o In India also, 14 leading banks were nationalized on July 18, 1969.
o Each one’s deposits were more than Rs 50 crores.
o Their share in total deposits and advances were almost two third of all scheduled banks in nation
o Nationalized banks were forced to follow directions and guidelines issued by government.
o At that time there were more than 645 banks having more than 4800 branches.
o They were serving only urban areas, big industrial houses at the cost of rural areas and small
industries.
o Indira Gandhi was the then P.M.
o 6 more banks were nationalized in 1980.
o National credit council was implementing body.
o In 1993 two banks were nationalized and no. of nationalized banks is 19.
15. Objectives Of Nationalization
o To reduce concentration of economic powers with only a few industrial magnets and to
prevent monopolies.
o Mobilize resources even from backward and rural areas
o To prevent lopsided regional development
o 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.
o 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.
o To fulfil credit needs of farmers: hardly 2.2% of funds were available for agriculture.
o To finance government’s development projects; specially five year plans
o To prevent giving loans to those firms were not existing in the priority list
o To prevent loan/advances to black marketers and hoarders.
16. Promotion Of New Entrepreneurship
oBanks have been actively financing IRDP, NREP, TRYSEM,
JRY, NRY.
oThe banks have been lending to the high priority projects in
the economy.