Presentation on theme: "ROLE OF COMMERCIAL BANK"— Presentation transcript:
1 ROLE OF COMMERCIAL BANK Presentation By: CA R.C. Bajpai
2 Functioning of Commercial Bank The commercial Banks in India play a major role in the development of the country itself. These banks are primarily concerned with providing loans and accepting deposits and are regulated by Reserve Bank Of India (RBI).Understanding the function, controls over the Functioning of the Commercial Bank is of immense importance to you, aspirants. This knowledge shall have manifold usefulness through out the training period as well as after becoming a Chartered Accountant. And whether you choose to be in practice or in Service the need to know about Commercial Banks can not be over emphasized.
3 Controlling Authority These banks work as per the parameter set by the regulating body. They are also bound to keep a certain amount in the Reserve Bank. This is known as CRR Cash Reserve Ratio.The lending capacity of the commercial banks in India are also related to this Cash Reserve Ratio because whenever it is raised by the Reserve Bank of India, the loan providing capacity of commercial banks decreases. On the other hand, the Reserve Bank of India also decides on the amount of asset that the commercial banks in India can keep in their direct possession. Again, the Reserve Bank of India determines the interest rates that the commercial banks can impose on the loan products. At the same time, these rates are also related to the interest rates that the commercial banks offer for the deposits.
4 Latest Bank Lending Rates Bank Rate6-0%(Since April 30, 2003)Cash Reserve Ratio (CRR)5-0%(Since January 17, 2009)Statutory Liquidity Ratio (SLR)24-0%(Since November 3, 2008)Repo Rate(Since March 4, 2009)Reverse Repo Rate3-5%
5 The main Commercial Bank of India are: Allahabad Bank· Andhra Bank · Canara Bank · Bank of India· State Bank of India· Union Bank of India· United Bank of India· UCO Bank· Indian Overseas Bank· Corporation Bank· Oriental Bank of Commerce· Bank of Baroda· Syndicate Bank· Dena Bank· Punjab National Bank· Vijaya Bank· Axis Bank· HDFC Bank· Bank of Rajasthan· Central Bank Of India
7 Objective of this session After studying this lesson, you will be able to -Describe the various functions of commercial banks;Differentiate between primary and secondary functions of Commercial banks;Classify and discuss the primary functions of modern commercial banksEnumerate the various modes of acceptance of deposits;Identify various methods of granting loans;Describe agency and general utility services of modern commercial Banks.
8 FunctionsThe functions of a commercial banks are divided into two categories:i) Primary functions, andii) Secondary functions including agency functions.
9 I. Primary FunctionsThe primary functions of a commercial bank include:a) accepting depositsb) granting loans and advances
10 a) Accepting depositsThe most important activity of a commercial bank is to mobilise deposits from the public. People who have surplus income and savings find it convenient to deposit the amounts with banks.Depending upon the nature of deposits, funds deposited withbank also earn interest. Thus, deposits with the bank grow along with the interest earned. If the rate of interest is higher, public are motivated to deposit more funds with the bank. There is also safety of funds deposited with the bank.
11 b) Grant of loans and advances The second important function of a commercial bank is to grantloans and advances. Such loans and advances are given tomembers of the public and to the business community at a higher rate of interest than allowed by banks on various deposit accounts.The rate of interest charged on loans and advances variesdepending upon the purpose, period and the mode of repayment.The difference between the rate of interest allowed on depositsand the rate charged on the Loans is the main source of a bank’s income.
12 i) Loans A loan is granted for a specific time period. Generally, Commercial banks grant short-term loans. But term loans,that is, loan for more than a year, may also be granted.The borrower may withdraw the entire amount in lump sumor in installments. However, interest is charged on the fullamount of loan. Loans are generally granted against theSecurity of certain assets. A loan may be repaid either inLump sum or in installments.
13 ii) AdvancesAn advance is a credit facility provided by the bank to itscustomers. It differs from loan in the sense that loans maybe granted for longer period, but advances are normallygranted for a short period of time. Further the purpose ofgranting advances is to meet the day to day requirementsof business. The rate of interest charged on advances variesfrom bank to bank. Interest is charged only on the amountwithdrawn and not on the sanctioned amount.Modes of short-term financial assistanceBanks grant short-term financial assistance by way of cash credit,overdraft and bill discounting.
14 a) Cash CreditCash credit is an arrangement whereby the bank allows theborrower to draw amounts upto a specified limit. The amount iscredited to the account of the customer. The customer canwithdraw this amount as and when he requires. Interest is charged on the amount actually withdrawn. Cash Credit is granted as per agreed terms and conditions with the customers.
15 b) OverdraftOverdraft is also a credit facility granted by bank. A customerwho has a current account with the bank is allowed to withdrawmore than the amount of credit balance in his account. It is atemporary arrangement. Overdraft facility with a specified limitis allowed either on the security of assets, or on personal security,or both.A business overdraft is an ideal source of temporary funding when business expenses are unpredictable. Take a look on the benefits of business overdraft facilities:Convenient, flexible working capital financeMatched to your specific borrowing requirementEasy to administerMinimize cost
16 c) Discounting of Bills Banks provide short-term finance by discounting bills, that is,making payment of the amount before the due date of the billsafter deducting a certain rate of discount. The party gets thefunds without waiting for the date of maturity of the bills. Incase any bill is dishonoured on the due date, the bank can recoverthe amount from the customer.
17 Managing Trade RiskIn an exporting or importing transaction there are a range of risks that need to be considered before entering into contract of sale with another party. These issues can be costly and time consuming. The commercial banks provide following advisory services in this respect:Trade Credits (Buyer’s Credit, Supplier’s Credit)Letter of Credit Confirmations.Bills (Collection and discounting)Trade risk instruments
18 ii) Secondary functions Besides the primary functions of accepting deposits and lending money, banks perform a number of other functions which are called secondary functions. These are as follows –a) Issuing letters of credit, travellers cheques, circular notes etc.b) Undertaking safe custody of valuables, important documents, andsecurities by providing safe deposit vaults or lockers;c) Providing customers with facilities of foreign exchange.d) Transferring money from one place to another; and from onebranch to another branch of the bank.e) Standing guarantee on behalf of its customers, for makingpayments for purchase of goods, machinery, vehicles etc.f) Collecting and supplying business information;g) Issuing demand drafts and pay orders; and,h) Providing reports on the credit worthiness of customers.
19 TEST Your Knowledge Questions True or False: (i) Accepting deposits is an essential function of a moderncommercial bank.(ii) Granting loan to the borrowers is not the main function of abank.(iii) Ancillary services are also known as supplementary functions ofa commercial bank.(iv) General utility services are called non-banking services.(v) Services rendered by banks to the general public constitute themain function of banks.(vi) Bank charges some amount for the services rendered.(vii) Bank cannot buy and sell shares and debentures on behalf ofcustomers.(viii) Bank stands guarantee against loan raised by its customers fromother financial institutions.ix) Safe deposit vaults are made available by bank only to fixeddeposit account holders.(x) Banks generally grant long-term loans to industries.AnswersTrue i) iii) iv) vi) viii)False ii) v) vii) ix) x)
20 THANK YOU Presentation By: CA R. C. Bajpai R. C. Bajpai & Co THANK YOU Presentation By: CA R.C. Bajpai R.C. Bajpai & Co