35.Commercial Banks and Investment Institution - Brij

7/28/2019 35.Commercial Banks and Investment Institution - Brij

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Under guidance of

Mr. Abhijeet Singh

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Brij Kishore Gupta

MBA 2nd Sem.



Flow of Presentation Commercial Bank

Types of Commercial Bank

Types of loans granted by commercial banks Functions of Commercial banks

Investment Institutions

Life Insurance Corporation of India (LIC) Unit Trust of India (UTI)

General Insurance Corporation of India (GIC)

Mutual Fund2



Commercial Bank A commercial bank is a type of financial intermediary

and a type of bank.

After the great depression and the stock market crash of 1929, the U.S. Congress required that banks only engage inbanking activities, whereas investment banks were limitedto capital market activities.

Since the two no longer have to be under separateownership, some use the term "commercial bank" to referto a bank or a division of a bank that mostly deals withdeposits and loans from corporations or large businesses.

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Contd…. Commercial banking refer to a bank or a division of a

bank that mostly deals with deposits and loans fromcorporations or large businesses, as opposed to normalindividual members of the public .

It raises funds by collecting deposits from businesses andconsumers via checkable deposits, savings deposits, andtime (or term) deposits. It makes loans to businesses andconsumers. It also buys corporate bonds and governmentbonds. Its primary liabilities are deposits and primary

assets are loans and bonds.

Commercial bank is the term used for a normal bank todistinguish it from an investment bank.

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Types of Commercial BankCommercial

Banks

ScheduledBanks

Indian Banks

Public BanksPrivateBanks

Foreign

Banks

Non -Scheduled

Banks

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Scheduled Banks

Scheduled bank is one which is registered in the secondschedule of the Reserve Bank of India Act 1934. The followingconditions must be fulfilled by a bank for inclusion in thescheduled bank:

1. The banker concerned must be in business of banking inIndia.

2. It is either a company defined in Section 3 of the IndianCompanies Act 1956, or corporation or a company incorporated by or under any law force in any placeoutside India or an institution notified by the CentralGovernment in this behalf.

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3. The paid capital and collected funds of bank should notbe less than Rs. 5 lac.

4. Any activity of the bank will not adversely affect the

interests of depositors.

Every Scheduled bank enjoys the following facilities.

Such bank becomes eligible for debts/loans on bank

rate from the RBI. Such bank automatically acquire the membership of clearing house.

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Scheduled Banks may be classified into two groups

1. Indian Scheduled Banks2.Foreign Scheduled Banks

1. Indian Scheduled Banks:The Indian Scheduled Banks are those which have theirregistered offices in India and are registered in thesecond schedule of the RBI. Indian Scheduled Banks may

be distinguished in two part. A.Public sectorB.Private Sector

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A. Public Sector Banks: It Covers the following-

SBI group State Bank of India, with its seven associate bankscommand the largest banking resources in India. SBI and

its associate banks are:o State Bank of Indiao State Bank of Bikaner & Jaipuro State Bank of Hyderabado State Bank of Indoreo State Bank of Mysoreo State Bank of Patialao State Bank of Saurashtrao State Bank of Travancore

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Other Public Banks are-

Allahabad Bank , Andhra Bank , Bank of Baroda , Bank

of India , Bank of Maharashtra , Canara Bank , CentralBank of India , Corporation Bank , Dena Bank , IndianBank , Indian Overseas Bank , Oriental Bank of Commerce , Punjab & Sind Bank , Punjab National

Bank , Syndicate Bank , Union Bank of India , UnitedBank of India , UCO Bank , Vijaya Bank

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B. Private Sector

Axis Bank, Federal Bank , HDFC Bank , ICICI Bank,IDBI Bank, ING Vysya Bank, YES Bank etc.

2. Foreign Scheduled Banks:

Foreign Scheduled Banks comprise those commercialbanks which are registered in the second schedule of theRBI but have their registered office outside India.

ABN AMRO, American Express Bank , Bank of America , Citibank, Deutsche Bank , HSBC, JPMorganChase Bank

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Non - Scheduled Banks Banks which are not included in the Second Schedule of

the RBI, are known as non -scheduled banks. They may beclassified into four groups:

1. Banks with paid-up capital and reserves in excess of Rs. 5lakhs.

2. Banks with paid-up capital and reserves ranging betweenone lakh of rupees and five lakhs.

3. Banks with paid-up capital and reserves ranging betweenRs. 50,000 and Rs. 1,00,000.4. Banks with paid-up capital and reserves below Rs.

50,000.

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Types of loans granted by commercial

banks Secured loan

A secured loan is a loan in which the borrower pledgessome asset (e.g. a car or property) as collateral for the loan.

Mortgage loan A mortgage loan is a very common type of debt instrument,used by many individuals to purchase housing. In thisarrangement, the money is used to purchase the property.

Commercial banks, however, is given security - a lien onthe title to the house - until the mortgage is paid off in full.If the borrower defaults on the loan, the bank would havethe legal right to repossess the house and sell it, to recoversums owing to it.

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Unsecured loan

Unsecured loans are monetary loans that are not securedagainst the borrowers assets. These may be available from

financial institutions under many different guises ormarketing packages:

credit card debt

personal loans

bank overdrafts credit facilities or lines of credit

corporate bonds

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Functions of Commercial banks Repository Functions of Commercial Banks:

As repository of savings, commercial banks provide to theircustomers a range of financial investment such as-

Current deposit

Savings deposit

Fixed deposit

Deployment Function of Commercial Banks:

major function of the commercial banks is employmentof funds in different sectors of the economy.

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Commercial banks utilize their funds by -

granting loans and advances

investing them in industrial securities

underwriting industrial issues.

A major portion of the funds is employed by commercialbanks in loans. Bank loans can be divided into 4 parts-

Loans and advances

Overdraft

Cash Credit

Bills discounting

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Commercial Bank Manufacture Money:

Commercial bank create money out of their lending andinvesting operations.

Banks utilized the deposits which they get from thepeople by loaning them and investing them in securities.

Miscellaneous Function:

Processing of payments by way of telegraphic transfer,EFTPOS (Electronic Fund Transfer at Point Of Sale),

internet banking or other means.

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Issuing bank drafts and bank cheques.

Providing documentary and standby letter of credit,guarantees, performance bonds, securities underwritingcommitments and other forms of off balance sheetexposures.

Safekeeping of documents and other items in safedeposit boxes.

Currency exchange.

Payment of Insurance premiums, rents, income-tax,school fees etc.

Collection of cheques, bills, salaries, dividend, interestetc. on behalf of the customer.

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Investment Institutions

are the most popular form of financial intermediaries, which particularly catering to the needs of small saversand investors. They deploy their assets largely in

marketable securities.

The financial institutions are-

LIC

UTI GIC

Mutual Funds

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Life Insurance Corporation of India (LIC)

was established in 1956 as a wholly-owned corporation of the Government of India.

It was formed by the Life Insurance Corporation Act,1956, with the objective of spreading life insurance

much more widely and in particular to the rural area. Its investment policies has been designed after providinga thoughtful consideration to cardinal principles of safety, diversification of investment in terms of types of securities, number and types of enterprise, maturitiesand regions.

It also extends assistance for development of infrastructure facilities like housing, rural electrification,

water supply, sewerage, etc. In addition, it extendsresource support to other financial institutions throughsubscription to their shares and bonds, etc.

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Contd…

The main tenets of investment policy of the LIC are – Investment policy should be that the funds shall beinvested in such a manner, as to safeguard and promote tothe maximum extent possible the interest of the

policyholders. Investments should be dispersed over different classes of securities, industries and regions.

The corporation should act purely as an investor and not

assume the role of an operator or speculator and try to takeadvantage of temporary fluctuations in the market prices.

The corporation would underwrite security issues aftercareful investigation of the project from financial,economic, technical, managerial and social angles.

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Unit Trust of India (UTI)

was set up as a body corporate under the UTI Act, 1963, with a view to encourage savings and investment.

It mobilises savings of small investors through sale of unitsand channelizes them into corporate investments mainly by way of secondary capital market operations.

Its primary objective is to stimulate and pool the savings of the middle and low income groups and enable them toshare the benefits of the rapidly growing industrialisation

in the country. In December 2002, the UTI Act, 1963 was repealed with the

passage of Unit Trust of India (Transfer of Undertaking andRepeal) Act, 2002, paving the way for the bifurcation of UTI into 2 entities, UTI-I and UTI-II with effect from 1st

February 2003. 22



Objectives of UTI

To mobilize savings of the community by offeringsavers the triple benefits of safety, liquidity andprofitability of investments.

To channelize the pooled savings into productiveoutlets.

To give every one a chance to indirectly own shares andsecurities in a large number of select companies and toenable the investors to share in the wideningprosperity consequent on industrial growth.

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General Insurance Corporation of India (GIC) was formed in pursuance of the General Insurance

Business (Nationalisation) Act, 1972(GIBNA ), for thepurpose of superintending, controlling and carrying onthe business of general insurance or non-life insurance.

Initially, GIC had four subsidiary branches, namely,National Insurance Company Ltd , The New India

Assurance Company Ltd , The Oriental InsuranceCompany Ltd and United India Insurance Company Ltd.

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But these branches were delinked from GIC in 2000 toform an association known as 'GIPSA' (GeneralInsurance Public Sector Association).

The insurance premium charged by the GIC is inproportion to the potential loss.

The GIC policies are generally for shorter period of timeand there is no guarantee of renewal of policy on thesame terms or on any terms.

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Types of Mutual Funds

Stock Funds

Bonds Funds Balanced Funds

Offshore Funds

Specialized Funds

Leverage Funds

Taxation Funds

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Stock Funds

These funds invest primarily in common stock. There is abroad range of common stock funds- from those that investsolely in the new, un-established companies.

Bond FundsBond funds obviously employ their funds in bounds so asto ensure and fixed income to their investors.

Taxation Funds

Mutual Funds designed to provide tax exemption benefitsto the investors, whether in the domestic or foreign capitalmarket, are called taxation funds.

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Offshore funds

The subscription to these funds is mobilized frominternational financial markets for investment in theeconomics and capital markets of specific country.

Specialized FundsThese funds are directly invest in a specialized group of securities.

Leverage FundsLeverage funds are common stock funds whose mainobjective is to maximize capital appreciation.

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Balanced Funds

Balanced funds combine bonds and/or preferredstock with the ownership of common stock, usually atsome pre-determined percentage relationship.

Several balanced funds keep one-half of the

portfolio in common stocks and one-half in bonds andpreferred stocks.

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35.Commercial Banks and Investment Institution - Brij

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