This document provides an overview of commercial banking. It begins by defining commercial banks as financial institutions that accept deposits from the public and provide loans for investment, with the aim of earning profit. It describes their primary functions as accepting deposits and advancing loans through various products and services. It also discusses secondary functions like agency services, utility services, fund transfers, and their role in credit creation. The document then covers types of commercial banks, significance, money multiplier, challenges, and shifts in the industry. It concludes by presenting a case study on Punjab National Bank covering its non-performing assets, 2018 fraud scandal, regulatory response, and recommendations.

1. Commercial Banking
Krishna Parab- 70
Jinal Patel- 72
Pratik Patil- 75
Sagar Patil- 76

2. Meaning of Commercial Bank
⚫A commercial bank is a financial
institution which performs the functions
of accepting deposits from the general
public and giving loans for investment
with the aim of earning profit.
⚫In fact, commercial banks, as their
name suggests, profit-seeking
institutions, i.e., they do banking
business to earn profit.

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⚫They generally finance trade and
commerce with short-term loans. They
charge high rate of interest from the
borrowers but pay much less rate of
Interest to their depositors with the
result that the difference between the
two rates of interest becomes the
main source of profit of the banks.
⚫Examples- State Bank of India, HDFC
Bank etc

4. Types of Commercial Bank

5. 1.Public Bank
⚫ Refer to a type of commercial banks
that are nationalized by the
government of a country.
⚫ In public sector banks, the major stake
is held by the government.
⚫ Public sector banks operate under the
guidelines of Central bank.

6. 2. Private Bank
⚫Refer to a kind of commercial banks in
which major part of share capital is
individuals. These banks
held by private businesses and
are
registered as companies with limited
liability.

7. 3. Foreign Bank
⚫Foreign Banks are international bank
which are setup or registered in
foreign countries and are obligated to
follow regulations of both its home and
host country.
⚫For Example- Citi Bank, Bank of
America etc.

8. Significance of Commercial
Banks
⚫ (ii) They are source of finance and credit for
trade and industry.
⚫ (iii) They promote balanced regional
development by opening branches in
backward areas.
⚫ (iv) Bank credit enables entrepreneurs to
innovate and invest which accelerates the
process of economic development.
⚫ (i) They promote savings and accelerate
the rate of capital formation

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⚫(v) They help in promoting large-scale
production and growth of priority sectors
such as agriculture, small-scale industry,
retail trade and export.
⚫(vi) They create credit in the sense that
they are able to give more loans and
advances than the cash position of the
depositor’s permits.
⚫(vii)They help commerce and industry to
expand their field of operation.

10. Functions of Commercial Banks
Primary Functions
• Accepting Deposits
• Advancing Loans
Secondary Functions
• Agency Services
• General Utility Services
• Transfer of Funds
• Credit Creation

11. 1. Primary Functions
⚫Accepting Deposits:
The primary function for which the commercial banks were
established is to accept deposits from the general public,
who possess surplus funds and are willing to deposit them
so as to earn interest on it.
There are various products offered by the bank to the
customers for the deposit of their money, which includes
savings account, current account, fixed deposit and
recurring deposit.

12. Types of Deposits Accounts

13. Savings Account
A savings account is a financial product offered by banks and
other financial institutions that allows individuals to deposit
and save money securely. It is designed for short-to-medium-
term savings goals. Depositors earn interest on their account
balances, providing a modest return on their savings. Savings
accounts are considered low-risk and often come with deposit
insurance to protect the account holder's funds up to a certain
limit. These accounts offer liquidity, allowing easy access to
funds when needed, though there may be restrictions on the
number of withdrawals per month. Savings accounts are
commonly used for purposes such as building an emergency
fund, saving for specific goals, or simply keeping funds in a
secure and accessible place.

14. Current Account
A current account is a type of bank account that facilitates
daily financial transactions for individuals and businesses. It
allows for unlimited deposits and withdrawals, making it a
highly liquid account. Unlike savings accounts, current accounts
usually do not earn significant interest. They often come with
features such as checkbooks, debit cards, and overdraft
facilities, providing easy access to funds for day-to-day
spending. Current accounts are suitable for managing regular
expenses, business transactions, and facilitating easy money
transfers.

15. Fixed Deposits
A fixed deposit (FD), also known as a term deposit or time
deposit, is a financial instrument offered by banks and financial
institutions. In a fixed deposit, an individual deposits a sum of
money with the bank for a specified period, ranging from a few
months to several years. The deposited amount earns a fixed
interest rate over the agreed-upon term, and the principal
amount is returned to the depositor at the end of the maturity
period.

16. Reccuring Deposits
A fixed deposit (FD), also known as a term deposit or time
deposit, is a financial instrument offered by banks and financial
institutions. In a fixed deposit, an individual deposits a sum of
money with the bank for a specified period, ranging from a few
months to several years. The deposited amount earns a fixed
interest rate over the agreed-upon term, and the principal
amount is returned to the depositor at the end of the maturity
period.

17. 2. Advancing Loans
 Next important function performed by the
commercial bank is lending money to the
individuals and companies.
 This is, in fact, the main source of income of the
bank. A bank keeps a certain portion of the
deposits with itself as reserve and gives (lends)
the balance to the borrowers.
 The banks make loans to the customers in the
form of term loans, cash credit, overdraft,
Discounting of bills of exchange, short loans and
so on.

18. Forms of Loan
Term Loans Cash Credit
Overdraft
Discounting of
Bills of Exchange
Loans and
Advances

19. Term Loans
Term loans are a type of borrowing arrangement where a
borrower receives a lump sum of money from a lender and
agrees to repay it over a specified period, known as the loan
term. These loans can be obtained from banks, financial
institutions, or online lenders. Term loans are commonly used
for various purposes, such as starting or expanding a business,
purchasing assets, or funding specific projects. They typically
have a fixed or variable interest rate and require regular,
scheduled payments over the agreed-upon term. The
repayment period can vary, ranging from a few months to
several years, depending on the terms of the loan and the
borrower's needs.

20. Cash Credit
Cash credit is a form of loan provided by banks to businesses.
It operates as a revolving credit facility, allowing the borrower
to withdraw funds up to a predetermined limit. The borrower
can use and repay the funds as needed, similar to a credit
card. Interest is charged only on the amount withdrawn,
providing flexibility for managing short-term financial needs.
Cash credit is commonly used by businesses to address
working capital requirements, such as purchasing inventory or
managing cash flow fluctuations.

21. Overdraft
An overdraft is a type of loan offered by banks
that allows an account holder to withdraw more
amount then available in their account upto
preapproved limit. Overdraft are useful for
temporary cash shortages and providing flexibility
in handling day to day expenses. Overdrafts are
commonly used by individuals and businesses to
navigate fluctuations in cash flow.

22. Discounting of Bill
Discounting of bills of exchange is a financial practice
where a bank purchases a bill of exchange from a
business or an individual before its maturity date. The
bank deducts the interest or discount upfront and pays
the bill's face value to the holder. The bank then collects
the full amount when the bill matures. This process
provides immediate liquidity to the bill holder, allowing
them to access funds before the bill's due date. The
discount represents the interest charged by the bank for
advancing the money. Discounting bills of exchange is a
common financing method for businesses managing their
cash flow and short-term financial needs.

23. Secondary functions
Agency Services: There are some
facilities provided by the commercial
banks in which they act as an agent of
the customers. Such services are:
⚫Collection and payment of rent, interest
and dividend.
⚫Collection and payment of cheques and
bills.
⚫Buying and selling securities.
⚫Payment of insurance premium and
subscriptions.

24. General Utility Services :
Commercial banks provide general
utility services to the customers and
charges a fee for the same. It covers
services like:
I. Safekeeping of valuables,documents
etc, in locker or vault.
II. ATM card, credit card and debit card
facility.
III. Issue of demand draft, pay order and
traveller’s cheque.

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iv. Internet and mobile banking
v. Sale of application forms of
competitive exams.
vi. Purchase and sale of foreign
exchange (currency).
vii. Locker facility. The customers can
keep their ornaments and important
documents in lockers for safe
custody.

26. Transfer of funds:
Banks assist in the transfer of funds
from one person to another or from
one place to another through its credit
instruments.

27. Credit Creation
⚫ The commercial banks are authorized to create
credit, by granting more loans than the amounts
deposited by the customers.
⚫ Credit Creation is a situation in which banks
make more loans to consumers and
businesses, with the result that the amount of
money in circulation(being passed from one
person to another) increases. In other words it
refers to the unique power of the banks to multiply
loans and advances, and hence deposits.

28. Total deposits of a bank is of
two types:
(i) Primary deposits (initial cash deposits by the public) and
(ii) Secondary deposits (deposits that arise due to loans given
by the banks which are assumed to be re-deposited in the
bank.)
Money creation by commercial banks is determined by
two factors namely :
(i) Primary deposits i.e. initial cash deposits and
(ii) Cash Reserve Ratio (CRR), i.e., minimum ratio of deposits
which is legally compulsory for the commercial banks to keep
as cash in liquid form.

29. Money Multiplier:
⚫It means the multiple by which total
deposit increases due to initial
(primary) deposit.
⚫Money multiplier (or credit multiplier) is
the inverse of Cash Reserve Ratio
(CRR).
⚫If CRR is 10%, i.e., 10/100or 0.1, then
money multiplier = 1/0.1 = 10 times

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⚫Smaller the CRR, larger would be the
size of money multiplier credited to his
account.
Conclusion
⚫Higher the cash reserve ratio, lower
the credit creation.
⚫Lower the cash reserve ratio, higher
the credit creation.

31. Determinants of credit creation
⚫Since credit creation occurs through the
lending process then factors that
influence demand and supply of loans
influence credit creation. They include :
⚫Any changes in the cash ratio, if cash
reserve increases, credit creation reduce
and vice versa.
⚫Demand for loans, higher demand allows
more credit creation. Low demand
means low credit creation.

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⚫Availability of credit worth borrowers. If
there are only few credit worth
borrowers, credit creation would also be
limited and vice-versa.
⚫Extent of the use of banks by the public.
If only a few people deposit money in the
banks, loanable funds would be limited
and vice versa.
⚫The nature of the monetary policy, if
expansionary, more credit would be
created, if restrictive, less would be
created.

33. Fractional Reserve Banking
System
Fractional reserve banking is a system where banks are required to
hold only a fraction of their customers' deposits as reserves. This
allows them to lend out the remaining funds, effectively creating
money through the process of lending. It's a key feature of modern
commercial banking systems, facilitating economic growth but also
posing risks such as bank runs.

34. Challenges
 Regulatory Compliance
 Legacy Systems
 Customer Expectations
 Digital Disruption
 Cybersecurity Threats
 Low Interest Rates
 Credit Risks
 Competition and Innovation

35. Major shifts in Commercial Banking
In 2023, the commercial banking industry is undergoing
several shifts compared to 2022, as outlined below:
 Increase in digital product and payment capabilities,
which has risen from 26% to 39%. However, there has been
a decrease in the use of big data, AI, and advanced
analytics, which has dropped from 43% to 39%.
 A decline in the focus on improving integrated
multichannel delivery, which has decreased from 32% to
24%

37. As per research published by BCG group

38. Case Study- Punjab
National Bank
Introduction: Punjab National Bank (PNB) is a
significant player in the Indian banking sector,
contributing to economic development by
channelizing savings and providing financial
services. However, recent challenges, including
rising non-performing assets (NPAs) and a major
fraud, have cast a shadow on its stability.
Background: Banks, as financial intermediaries,
play a crucial role in economic development by
accepting deposits, granting loans, and diversifying
into various financial services. The Indian banking
sector, guided by Basel regulations, has undergone
reforms to enhance its efficiency and regulatory
oversight.

39.  Banking Reforms in India: Initiated by committees like Narsimham
in 1991, banking reforms aimed at strengthening financial
systems, reducing Cash Reserve Ratio (CRR) and Statutory
Liquidity Ratio (SLR), introducing income recognition norms, and
enhancing capital adequacy. However, the delayed
implementation of Basel III in India and the emergence of NPAs
pose challenges.
 Non-Performing Assets (NPAs):NPAs, classified as sub-standard,
doubtful, or loss assets, present a growing challenge to the
banking sector. Deteriorating asset quality has become a major
concern, affecting the overall health of the banking industry.

40.  Punjab National Bank's Forecasted NPAs: Using a multiple
linear regression model, this study forecasts PNB's NPAs in
2025 based on quarterly data from 2010 to 2017. The model
considers variables like inflation rate, repo rate, gross
domestic product (GDP), and loans and advances. The
forecasted NPAs indicate a potential challenge to the bank's
financial stability.
 PNB Mega Scam: In February 2018, PNB disclosed a major
fraud involving unauthorized letters of undertaking (LOUs)
issued by employees to facilitate loans to companies like
Nirav Modi's. The fraud, spanning seven years, amounted to
$1.77 billion, impacting PNB's financial position.

41.  Regulatory Response and Aftermath: In response to the scam,
the Reserve Bank of India (RBI) banned banks from issuing
LOUs and directed them to connect their core banking systems
to SWIFT. Legal actions ensued, leading to the arrest of Nirav
Modi. PNB, facing guarantees worth Rs. 11,400 crores, took
measures to address the stress caused by the fraud.
 Reforms and Recommendations: The study recommends
sector-wise planning, sound banking practices, higher
provisioning requirements, and legal reforms to enhance the
regulatory framework. Suggestions include transparent
processes, ownership-neutral regulations, and vigilance to
prevent recurring crises.

42. Conclusion
The PNB case highlights the critical need for regulatory
reforms, ethical banking practices, and enhanced corporate
governance. While forecasting tools provide insights,
proactive measures, legal reforms, and stricter regulatory
oversight are essential for ensuring the stability and
integrity of the banking sector.

43. https://youtu.be/cqGkm6qtRWg?si=80wfK8sQIJtBfZc-

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