1. Commercial bank management

2. Meaning of bank A bank is an institution which accepts deposits from the public and in return advances loans by creating credit.

3. Types of banks Commercial banks Exchange banks Industrial banks Agricultural banks Cooperative banks Saving banks Central bank

4. Functions of commercial banks Accepting deposits Giving loans Overdraft Discounting of bills of exchange Investment of funds Agency functions Miscellaneous functions

5. Accepting Deposits: The most important function of commercial banks is to accept deposits from the public. Various sections of society, according to their needs and economic condition, deposit their savings with the banks. For example, fixed and low income group people deposit their savings in small amounts from the points of view of security, income and saving promotion. On the other hand, traders and businessmen deposit their savings in the banks for the convenience of payment. Therefore, keeping the needs and interests of various sections of society, banks formulate various deposit schemes. Generally, there ire three types of deposits which are as follows:

6. Current Deposits: The depositors of such deposits can withdraw and deposit money when­ever they desire. Since banks have to keep the deposited amount of such accounts in cash always, they carry either no interest or very low rate of interest. These deposits are called as Demand Deposits be­cause these can be demanded or withdrawn by the depositors at any time they want. Such deposit ac­counts are highly useful for traders and big business firms because they have to make payments and accept payments many times in a day. Fixed Deposits: These are the deposits which are deposited for a definite period of time. This period is generally not less than one year and, therefore, these are called as long term deposits. These deposits cannot be withdrawn before the expiry of the stipulated time and, therefore, these are also called as time deposits. These deposits generally carry a higher rate of interest because banks can use these deposits for a definite time without having the fear of being withdrawn.

7. Saving Deposits: In such deposits, money upto a certain limit can be deposited and with­drawn once or twice in a week. On such deposits, the rate of interest is very less. As is evident from the name of such deposits their main objective is to mobilise small savings in the form of deposits. These deposits are generally done by salaried people and the people who have fixed and less income.

8. Giving Loans: The second important function of commercial banks is to advance loans to its customers. Banks charge interest from the borrowers and this is the main source of their income. Banks advance loans not only on the basis of the deposits of the public rather they also advance loans on the basis of depositing the money in the accounts of borrowers. In other words, they create loans out of deposits and deposits out of loans. This is called as credit creation by commercial banks. Modern banks give mostly secured loans for productive purposes. In other words, at the time of advancing loans, they demand proper security or collateral. Generally, the value of security or collateral is equal to the amount of loan. This is done mainly with a view to recover the loan money by selling the security in the event of non- refund of the loan. At limes, banks give loan on the basis of personal security also. Therefore, such loans are called as unsecured loan. Banks generally give following types of loans and advances:

9. Cash Credit: In this type of credit scheme, banks advance loans to its customers on the basis of bonds, inventories and other approved securities. Under this scheme, banks enter into an agreement with its customers to which money can be withdrawn many times during a year. Under this set up banks open accounts of their customers and deposit the loan money. With this type of loan, credit is created. Demand loans: These are such loans that can be recalled on demand by the banks. The entire loan amount is paid in lump sum by crediting it to the loan account of the borrower, and thus entire loan becomes chargeable to interest with immediate effect. Short-term loan: These loans may be given as personal loans, loans to finance working capital or as priority sector advances. These are made against some security and entire loan amount is transferred to the loan account of the borrower.

10. Over-Draft: Banks advance loans to its customer’s upto a certain amount through over-drafts, if there are no deposits in the current account. For this banks demand a security from the customers and charge very high rate of interest. Discounting of Bills of Exchange: This is the most prevalent and important method of advancing loans to the traders for short-term purposes. Under this system, banks advance loans to the traders and business firms by discounting their bills. In this way, businessmen get loans on the basis of their bills of exchange before the time of their maturity.

11. Investment of Funds: The banks invest their surplus funds in three types of securities—Government securities, other approved securities and other securities. Government securities include both, central and state govern­ments, such as treasury bills, national savings certificate etc. Other securities include securities of state associated bodies like electricity boards, housing boards, debentures of Land Development Banks units of UTI, shares of Regional Rural banks etc.

12. Agency Functions: Banks function in the form of agents and representatives of their customers. Customers give their consent for performing such functions. The important functions of these types are as follows: (i) Banks collect cheques, drafts, bills of exchange and dividends of the shares for their custom­ers. (ii) Banks make payment for their clients and at times accept the bills of exchange: of their cus­tomers for which payment is made at the fixed time. (iii) Banks pay insurance premium of their customers. Besides this, they also deposit loan installments, income-tax, interest etc. as per directions. (iv) Banks purchase and sell securities, shares and debentures on behalf of their customers. (v) Banks arrange to send money from one place to another for the convenience of their custom­ers.

13. Miscellaneous Functions: Besides the functions mentioned above, banks perform many other functions of general utility which are as follows: (i) Banks make arrangement of lockers for the safe custody of valuable assets of their custom­ers such as gold, silver, legal documents etc. (ii) Banks give reference for their customers. (iii) Banks collect necessary and useful statistics relating to trade and industry. (iv) For facilitating foreign trade, banks undertake to sell and purchase foreign exchange. (v) Banks advise their clients relating to investment decisions as specialist (vi) Bank does the under-writing of shares and debentures also. (vii) Banks issue letters of credit. (viii) During natural calamities, banks are highly useful in mobilizing funds and donations. (ix) Banks provide loans for consumer durables like Car, Air- conditioner, and Fridge etc.

14. Role of commercial banks in developing country Mobilizing savings for capital formation Financing industry Financing trade Financing agriculture Financing consumer activities Financing employment generation activities Help in monetary policy

15. Principles of banking Liquidity Safety profitability

16. Types of deposit accounts Saving deposit;- Savings deposit account is meant for individuals who wish to deposit small amounts out of their current income. A saving account can be opened with or without cheque book facility. There are restrictions on the withdrawls from this account. Savings account holders are also allowed to deposit cheques, drafts, dividend warrants, etc. drawn in their favour for collection by the bank.

17. Features of saving deposit;- Promote savings No restriction on number and amount of deposits Withdrawals are allowed subject to certain restrictions Income by way of interest

18. Fixed deposit;- The term ‘Fixed deposit’ means deposit repayable after the expiry of a specified period. Since it is repayable only after a fixed period of time, which is to be determined at the time of opening of the account, it is also known as time deposit. Fixed deposits are most useful for a commercial bank. Since they are repayable only after a fixed period, the bank may invest these funds more profitably by lending at higher rates of interest and for relatively longer periods. The rate of interest on fixed deposits depends upon the period of deposits. The longer the period, the higher is the rate of interest offered. The rate of interest to be allowed on fixed deposits is governed by rules laid down by the Reserve Bank of India.

19. Features of fixed deposit;- High rate of interest Loan facility Encourages saving habits for longer period Bank can also invest such funds in profitable areas Bank can lend such funds for short term loans Bank can get the funds for longer period of time

20. Current deposit;- Also called ‘demand deposit’, current deposit can be withdrawn by the depositor at any time by cheques. Businessmen generally open current accounts with banks. Current accounts do not carry any interest as the amount deposited in these accounts is repayable on demand without any restriction. The Reserve bank of India prohibits payment of interest on current accounts or on deposits upto 14 Days or less except where prior sanction has been obtained. Banks usually charge a small amount known as incidental charges on current deposit accounts depending on the number of transaction.

21. Features of current deposit;- No restrictions on number and amount of deposits No restrictions on withdrawals Enable the businessman to conduct business transactions smoothly Continuing nature no fixed period

22. Recurring deposit;- Under this type of deposit, the depositor is required to deposit a fixed amount of money every month for a specific period of time. Each installment may vary from Rs.5/- to Rs.500/- or more per month and the period of account may vary from 12 months to 10 years. After the completion of the specified period, the customer gets back all his deposits along with the cumulative interest accrued on the deposits.

23. Features of recurring deposit;- Encourages regular saving habits Loan facility Rate of interest is high Period of deposit is minimum six months and maximum ten years

24. Principles of sound lending Safety;- As the bank lends the funds entrusted to it by the depositors, the first and foremost principle of lending is to ensure the safety of the funds lent. By safety is meant that the borrower is in a position to repay the loan, along with interest, according to the terms of the loan contract. The repayment of the loan depends upon the borrower''s (a) capacity to pay, and (2) willingness to pay. The former depends upon his tangible assets and the success of his business; if he is successful in his efforts, he earns profits and can repay the loan promptly. Otherwise, the loan is recovered out of the sale proceeds of his tangible assets. The willingness to pay depends upon the honesty and character of the borrower. The banker should, therefore, taken utmost care in ensuring that the enterprise or business for which a loan is sought is a sound one and the borrower is capable of carrying it out successfully. He should be a person of integrity, good character and reputation. In addition to the above, the banker generally relies on the security of tangible assets owned by the borrower to ensure the safety of his funds.

25. Liquidity;- Banks are essentially intermediaries for short term funds. Therefore, they lend funds for short periods and mainly for working capital purposes. The loans are, therefore, largely payable on demand. The banker must ensure that the borrower is able to repay the loan on demand or within a short period. This depends upon the nature of assets owned by the borrower and pledged to the banker. For example, goods and commodities are easily marketable while fixed assets like land and buildings and specialized types of plants and equipments can be liquidated after a time interval. Thus, the banker regards liquidity as important as safety of the funds and grants loans on the security of assets which are easily marketable without much loss.

26. Profitability;- Commercial banks are profit-earning institutions; the nationalized banks are no exception to this. They must employ their funds profitably so as to earn sufficient income out of which to pay interest to the depositors, salaries to the staff and to meet various other establishment expenses and distribute dividends to the shareholders (the Government in case of nationalized banks). The rates of interest charged by banks were in the past primarily dependant on the directives issued by the Reserve Bank. The variations in the rates of interest charged from different customers depend upon the degree of risk involved in lending to them. A customer with high reputation is charged the lower rate of interest as compared to an ordinary customer. The sound principle of lending is not to sacrifice safety or liquidity for the sake of higher profitability. That is to say that the banks should not grant advances to unsound parties with doubtful repaying capacity, even if they are ready to pay a very high rate of interest. Such advances ultimately prove to be irrecoverable to the detriment of the interests of the bank and its depositors.

27. The Purpose of the Loan;- While lending his funds, the banker enquires from the borrower the purpose for which he seeks the loan. Banks do not grant loans for each and every purpose—they ensure the safety and liquidity of their funds by granting loans for productive purposes only, viz., for meeting working capital needs of a business enterprise. Loans are not advanced for speculative and unproductive purposes like social functions and ceremonies or for pleasure trips or for the repayment of a prior loan. Loans for capital expenditure for establishing business are of long-term nature and the banks grant such term loans also. After the nationalization of major banks loans for initial expenditure to start small trades, businesses, industries, etc., are also given by the banks.

28. The Principle of Diversification of Risks;- This is also a cardinal principle of sound lending. A prudent banker always tries to select the borrower very carefully and takes tangible assets as securities to safeguard his interests. Tangible assets are no doubt valuable and the banker feels safe while granting advances on the security of such assets, yet some risk is always involved therein. An industry or trade may face depression conditions and the price of the goods and commodities may sharply fall. Natural calamities like floods and earthquakes, and political disturbances in certain parts of the country may ruin even a prosperous business. To safeguard his interest against such unforeseen contingencies, the banker follows the principle of diversification of risks based on the famous maxim "do not keep all the eggs in one basket." It means that the banker should not grant advances to a few big firms only or to concentrate them in a few industries or in a few cities or regions of the country only. The advances, on the other hand, should be over a reasonably wide area, distributed amongst a good number of customers belonging to different trades and industries. The banker, thus, diversifies the risk involved in lending. If a big customer meets misfortune, or certain trades or industries are affected adversely, the overall position of the bank will not be in jeopardy.