ROLE OF COMMERCIAL BANK Presentation By: CA R.C. Bajpai

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.

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.

Latest Bank Lending Rates Bank Rate 6-0% (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 Rate 3-5%

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

Legal Regulations RBI Act (1934) Banking Regulation Act (1949) Prevention of Money Laundering Act (2002) IT Act (2000).

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 banks Enumerate the various modes of acceptance of deposits; Identify various methods of granting loans; Describe agency and general utility services of modern commercial Banks.

Functions The functions of a commercial banks are divided into two categories: i) Primary functions, and ii) Secondary functions including agency functions.

I. Primary Functions The primary functions of a commercial bank include: a) accepting deposits b) granting loans and advances

a) Accepting deposits The 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 with bank 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.

b) Grant of loans and advances The second important function of a commercial bank is to grant loans and advances. Such loans and advances are given to members 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 varies depending upon the purpose, period and the mode of repayment. The difference between the rate of interest allowed on deposits and the rate charged on the Loans is the main source of a bank’s income.

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 sum or in installments. However, interest is charged on the full amount of loan. Loans are generally granted against the Security of certain assets. A loan may be repaid either in Lump sum or in installments.

ii) Advances An advance is a credit facility provided by the bank to its customers. It differs from loan in the sense that loans may be granted for longer period, but advances are normally granted for a short period of time. Further the purpose of granting advances is to meet the day to day requirements of business. The rate of interest charged on advances varies from bank to bank. Interest is charged only on the amount withdrawn and not on the sanctioned amount. Modes of short-term financial assistance Banks grant short-term financial assistance by way of cash credit, overdraft and bill discounting.

a) Cash Credit Cash credit is an arrangement whereby the bank allows the borrower to draw amounts upto a specified limit. The amount is credited to the account of the customer. The customer can withdraw 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.

b) Overdraft Overdraft is also a credit facility granted by bank. A customer who has a current account with the bank is allowed to withdraw more than the amount of credit balance in his account. It is a temporary arrangement. Overdraft facility with a specified limit is 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 finance Matched to your specific borrowing requirement Easy to administer Minimize cost

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 bills after deducting a certain rate of discount. The party gets the funds without waiting for the date of maturity of the bills. In case any bill is dishonoured on the due date, the bank can recover the amount from the customer.

Managing Trade Risk In 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

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, and securities 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 one branch to another branch of the bank. e) Standing guarantee on behalf of its customers, for making payments 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.

TEST Your Knowledge Questions True or False: (i) Accepting deposits is an essential function of a modern commercial bank. (ii) Granting loan to the borrowers is not the main function of a bank. (iii) Ancillary services are also known as supplementary functions of a commercial bank. (iv) General utility services are called non-banking services. (v) Services rendered by banks to the general public constitute the main function of banks. (vi) Bank charges some amount for the services rendered. (vii) Bank cannot buy and sell shares and debentures on behalf of customers. (viii) Bank stands guarantee against loan raised by its customers from other financial institutions. ix) Safe deposit vaults are made available by bank only to fixed deposit account holders. (x) Banks generally grant long-term loans to industries. Answers True i) iii) iv) vi) viii) False ii) v) vii) ix) x)

THANK YOU Presentation By: CA R. C. Bajpai R. C. Bajpai & Co THANK YOU Presentation By: CA R.C. Bajpai R.C. Bajpai & Co. rcb@rcbajpai.com www.rcbajpai.com 91-9415052437