Commercial Banking Amey Dalvi No 19

TYBBI Commercial Banking

Introduction of banking :

K.P.B. Hinduja College 1


anking, in its crude form, is an age-old phenomenon. It was in

existence even in ancient times, too. It is the business of

providing financial services to consumers and businesses. They

are the single major source of institutional finance in the country.

BAccording to Section 5 (c) of the Banking Regulation Act, 1949 -

“Banking Company means any company which transacts the business of

banking in India”. Section 5 (b) of the act defines banking as accepting for

the purpose of lending or investment of deposits of money fro the public

repayable on demand or otherwise and withdrawable by cheque, draft, order

or otherwise.

Banking services also serve two primary purposes. First, by

supplying customers with the basic mediums-of-exchange (cash, checking

accounts, and credit cards), banks play a key role in the way goods and

services are purchased. Without these familiar methods of payment, goods

could only be exchanged by barter (trading one good for another), which is

extremely time-consuming and inefficient. Second, by accepting money

deposits from savers and then lending the money to borrowers, banks

encourage the flow of money to productive use and investments. This in turn

allows the economy to grow. Without this flow, savings would sit idle in

someone’s safe or pocket, money would not be available to borrow, people

would not be able to purchase cars or houses, and businesses would not be

able to build new factories the economy needs to produce more goods and

grow. Enabling the flow of money from savers to investors is called

financial intermediation, and thus, banking is extremely important to a free

market economy.

Origin and Evolution of Indian Banking



Opinions differ as to the origin of the work "Banking". The word

"Bank" is said to be of Germanic origin, cognate with the French word

"Banque" and the Italian word "Banca", both meaning "bench". It is

surmised that the word would have drawn its meaning from the practice of

the Jewish money-changers of Lombardy, a district in North Italy, who in

the middle ages used to do their business sitting on a bench in the market

place. Again, the etymological origin of the word gains further relevance

from the derivation of the word "Bankrupt" from the French word "Banque

route" and the Italian word "Banca-rotta" meaning "Broken bench" due

probably to the then prevalent practice of breaking the bench of the money-

changer, when he failed.

Banking is different from money-lending but two terms have in

practice been taken to convey the same meaning. Banking has two important

functions to perform, one of accepting deposits and other of lending monies

and/or investment of funds. It follows from the above that the rates of

interest allowed on deposits and charged on advances must be known and

reasonable. The money-lender advances money out of his own private

wealth hardly accepts deposits and usually charges high rates of interest.

More often, the rates of interest relate to the needs of the borrower. Money-

lending was practiced in all countries including India, much earlier than the

recent type of Banking came on scene.

Significance of Banks



The importance of a bank to modern economy, so as to enable them to

develop, can be stated as follows:

(i) The banks collect the savings of those people who can save and allocate

them to those who need it. These savings would have remained idle due to

ignorance of the people and due to the fact that they were in scattered and

oddly small quantities. But banks collect them and divide them in the

portions as required by the different investors.

(ii) Banks preserve the financial resources of the country & it is expected

that they allocate them appropriately in the suitable & desirable manner.

(iii) They make available the means for sending funds from one place to

another and do this in cheap, safe and convenient manner.

(iv) Banks arrange for payments by cheques, order or bearer, crossed and

uncrossed, which is the easiest and most convenient. Besides they also care

for making such payments as safe as possible.

(v) Banks also help their customers, in the task of preserving their precious

possessions intact and safe. To advance money, the basis of modern industry

and economy and essential for financing the developmental process, is

governed by banks.

(vii) It makes the monetary system elastic. Such elasticity is greatly desired

in the present economy, where the phase of economy goes on changing and

with such changes, demand for money is required. It is quite proper and

convenient for the government and R.B.I. to change its currency and credit

policy frequently, this is done by RBI, by changing the supply of money

with the changing needs of the public.

Although traditionally, the main business of banks is acceptance of

deposits and lending, the banks have now spread their wings far and wide

into many allied and even unrelated activities.

Structure of Banking System



At present, the organized banking system in India can be broadly divided

into three categories:

i) The Central Bank of the country, the Reserve Bank of India

ii) The Commercial Banks

iii) The Cooperative Banks.

The RBI is the apex monetary and banking authority in the country

and has the responsibility to control the banking system in India.

Commercial banks play a major role in the growth and development

of the country. They mobilize savings and make them available to large and

small industrial enterprise and traders for working capital requirements.

After 1969, commercial banks are broadly classified into nationalized or

public sector banks and private sector banks. The SBI and its associate

banks along with another 20 banks are the public sector banks. The private

sector banks include Indian scheduled banks which have not been

nationalized and branches of foreign banks operating in India. The Regional

Rural Banks came into existence since the middle of 1970s with the specific

objective of providing credit and deposits facilities to the small and marginal

farmers, agricultural labourers and artisans and small entrepreneurs.

Banking in India



Banking in India act as a connected link between the borrowers and lenders

of money. The banks main activity should be to do the business of banking

which should not be subsidiary to any other business. Thus, a bank should

always add the word “Bank” to its name to enable people to know that it is a

bank and is dealing in money.


http://en.wikipedia.org/wiki/Image:Scheduled_banking_structure_in_India.png


(From small to large, commercial banking have got u covered,

as In banking there is no such thing as “one size fits all” )

INTRODUCTION TO COMMERCIAL BANKS:

Commercial banks play a vital role in the economic development of a

nation. They are the most important source of institutional credit in the



money market as they provide short term loans and advances to its

customers. They perform a variety of functions and are the main source of

credit which is the main input for trade and business activity. Credit created

by commercial banks is a major component of money supply in a modern

economy. Modern economies depend on the banking sector for production,

exchange and distribution.

A Commercial bank is a type of financial intermediary and a type of

bank. Commercial bank has two possible meanings:

a) It is the term used for a normal bank to distinguish it from an

investment bank.

b) Commercial banking can also refer to a bank or a division of a

bank that mostly deals with deposits and loans from corporations or large

businesses, as opposed to normal individual members of the public (retail

banking).

A commercial bank is a profit seeking organization dealing in the

other people’s money, in the sense that it accepts deposits of money from the

public to keep them in its custody for safety. So also, it deals in credit, i.e., it

creates credit by making advances out of the funds received as deposits to

needy people. It charges higher rate of interests for the loans sanctioned and

offers lower rate of interest for the deposits. The difference between the two

is the profit earned by the bank. Thus, a commercial bank functions as a

mobiliser of saving in the economy.

The most distinctive feature of a commercial bank is that it accepts

deposits called demand deposits from the public which are chequable, i.e.,

withdrawable by means of cheque. Acceptance of chequable deposits alone,

however, does not give it a status of bank. Its essential function is to make

use of these deposits for lending to others.


http://en.wikipedia.org/wiki/Bank

http://en.wikipedia.org/wiki/Financial_intermediary


Commercial banks ordinarily are simple business or commercial

concerns which provide various types of financial services to 'customers in

return for payments in one form or another, such as interest, discounts, fees,

commission, and so on. So, we can say that their objective is to make profits.

A commercial bank is therefore like a reservoir into which flow the

savings, the idle surplus money of households and from which loans are

given on interest to businessmen and others who need them for investment

or productive uses.

DEFINITION

Economists have defined a Commercial Bank in various ways.

- According to Prof. Crowther, “a banker is a dealer in debt, his own and

other people’s.”

- According to Prof. says, “Commercial Banks are institutions whose

debts – usually referred to as bank deposits – are commonly accepted in final

settlement of other people’s deposits.”

Thus, all these definitions clearly indicate the essential function of a

bank namely dealing in money and credit.

CURRENT SCENARIO OF COMMERCIAL BANKING:

Currently (2010)overall, banking in India is considered as fairly mature in terms of supply, product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. Even in



terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets-as compared to other banks in comparable economies in its region. The Reserve Bank of India is an autonomous body, with minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is to manage volatility-without any stated exchange rate-and this has mostly been true. With the growth in the Indian economy expected to be strong for quite some time-especially in its services sector, the demand for banking services-especially retail banking, mortgages and investment services are expected to be strong. M&As, takeovers, asset sales and much more action (as it is unraveling in China) will happen on this front in India.

In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an investor has been allowed to hold more than 5% in a private sector bank since the RBI announced norms in 2005 that any stake exceeding 5% in the private sector banks would need to be vetted by them.

Currently, India has 88 scheduled commercial banks (SCBs) - 28 public sector banks (that is with the Government of India holding a stake), 29 private banks (these do not have government stake; they may be publicly listed and traded on stock exchanges) and 31 foreign banks. They have a combined network of over 53,000 branches and 17,000 ATMs. According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively.We know that, in banking, there is no such thing as "one size fits all." But today's commercial banks are more diverse than ever. You'll find a tremendous range of opportunities in Commercial banking, starting at the branch level because Commercial bankers, now are highly experienced in


http://en.wikipedia.org/wiki/Automated_teller_machine

http://en.wikipedia.org/wiki/Government_of_India


working with businesses to develop the right financial package to meet your unique business needs.

Thus, Commercial lending today is a very intense activity, with banks carefully analyzing the financial condition of their business clients to determine the level of risk in each loan transaction

FUNCTIONS OF COMMERCIAL BANKS



Commercial banks perform several crucial functions to satisfy the needs of the various sectors of the economy, which may be classified into two categories:

(I) Primary functions, and

(II) Secondary functions.

(I) Primary banking functions of the commercial banks include:

1. Acceptance of deposits from the

public;

2. Lending of funds;

3. Use of cheque system; and

4. Remittance of funds.

1. Acceptance of Deposits from the PublicAccepting deposits is the primary function of a commercial bank. By

receiving deposits from the public, commercial banks mobilize savings of

the household sector.

Banks generally accept deposits in three types of accounts:

(i) Current Account,

(ii) Savings Account, and

(iii) Fixed Deposits Account.

Deposits in Current Account are withdrawable by the depositors by cheques for any amount to the extent of the balance at their credit, at any time without any prior notice. Deposits of current accounts are, thus, known as Demand deposits. Such accounts are maintained by commercial and industrial firms and businessmen, and the cheque system is the most convenient and very safe mode of payment. No interest is provided for such deposits. In fact bank charge certain commission for providing the facility.



Saving Accounts are maintained for encouraging savings of households. Withdrawals from deposits from savings account are not freely allowed as in the case of current account. There are some restrictions on the amount to be withdrawn at a time and also on the number of withdrawals made during a period. Indian commercial banks have, however, relaxed these rules of savings accounts to a certain extent in recent times. Banks pay a rate of interest on the savings account deposits as prescribed by the central bank. Presently, it is 5 % p.a. A nominal rate of interest is provided for such deposits.

Deposits in Fixed Account are time deposits. In the normal course, deposits cannot be withdrawn before the expiry of the specified time period of the deposits. A premature withdrawal is, however, permitted only at the cost of forfeiture of the interest payable, at least partly. On these deposits commercial banks pay higher rates of interest, and the rate becomes higher with the increase in duration. Longer the time period, higher would be the rate of interest and vice versa.

By creating such varieties of deposits, banks motivate savers and

depositors in a variety of ways and encourage savings in the economy.

Further, by keeping deposits with banks, depositors’ money is not secure

and remains in safe custody, but it yields interest also. Moreover, banks

demand deposits are in the form of liquid cash, for they serve as money to

the business community and, therefore, are called bank money.

2. Lending of funds

Another major function of commercial banks is to extend loans and

advances out of the money which comes to them by way of deposits to



businessmen and entrepreneurs against approved such as gold or silver

bullion, government securities, easily saleable stocks and shares, and

marketable goods.

Banks advances to customers may be made in many ways:

(i) Overdrafts,

(ii) Cash Credits,

(iii) Discounting Trade Bills,

(iv) Money-at-call or very short-term advances,

(v) Term loans,

(vi) Consumer Credit,

(vii) Miscellaneous Advances.

(i) Overdraft: A commercial bank grants overdraft facility to an account

holder by which he is allowed to draw an amount in excess of the balance

held in the account, up to the extent of stipulated limit. Overdrafts are

permissible in current account only. Suppose, a customer has Rs. 50,000 in

his current account with the bank. Bank grants him overdraft facility up to

Rs. 10,000. Then, this customer is entitled to issue cheques upto Rs. 60,000

on his account. Obviously, overdraft facility sanctioned up to Rs.10,000 by

the bank in this case is as good as credit granted by the bank to that extent.

(ii) Cash credit: Bank give credit in cash to business firms in industry and

trade, against pledge or hypothecation of goods, or personal guarantee given

by the borrowers. It is essentially a drawing account against credit

sanctioned by the bank and is operated like a current account on which an

overdraft is sanctioned. It is the most popular mode of advance in the Indian

banking system.



(iii) Discounting trade bill: The banks facilitate trade and commerce by

discounting bills of exchange called trade bills. Traders often draw bill of

exchange to meet their obligations in business transitions. Such a trade bill is

payable in cash on maturity, after a stipulated date. Discounting of bills by

the bank amounts to granting of credit to the party concerned till the

maturity date of the bill. This method of bank lending is widely adopted for

two reasons: (a) such loans are self liquidator in character; and

(b) these trade bills are rediscountable with the central bank.

(iv) Money at call or very short term advances: Bank also grants loans for

a very short period, generally not exceeding 7 days to the borrowers, usually

dealers or brokers in stock exchange markets against collateral securities like

stock or equity shares, debentures, etc., offered by them. Such advances are

repayable immediately at notice hence, they are described as money at call

or call money.

(v) Term Loans: Banks give term loans to traders, industrialists and now to

agriculturists also against some collateral securities. Term loans are so-

called because their maturity period varies between 1 to 10 years. Term

loans as such provide intermediate or working capital funds to the

borrowers. Sometimes, two or more banks may jointly provide large term

loans to the borrower against a common security. Such loans are called

participation loans or consortium finance.

(vi) Consumer Credit: Banks also grant to households in a limited amount

to buy some durable consumer goods such as television sets, refrigerators,

etc; or to meet some personal needs like payment of hospital bills, etc. such



consumer credit is made in a lump sum and is repayable in installments in a

short time. Under the 20-point programme, the scope of consumer credit has

been extended to caver expenses on marriage funeral etc; as well.

(vi) Miscellaneous Advances: Among other forms of bank advances there

are packing credits given to exporters for a short duration, exports bills

purchased/ discounted, import finance - advances against import bills,

finance to the self employed, credit to the public sector, credit to the

cooperative sector and above all, credit to the weaker sections of the

community at concessional rates.

3. Use of cheque system:

It is a unique feature and function of banks that they have introduced

the cheque system for the withdrawl of deposits.

There are two types of cheques:

i) The bearer cheque and

ii) The crossed cheque.

A bearer cheque is encashable immediately at the bank by its possessor.

Since, it is negotiable, it serves as good as cash on transferability.



A crossed cheque, on the other hand, is one that is crossed by two parallel

lines on its face at the left hand corner and such a cheque is not immediately

encashable. It has to be deposited only in the payee’s account. It is not

negotiable.

In modern business transactions, the use of cheques to settle debts is

found to be much more convenient than the use of cash. Commercial banks,

thus, render an important service by providing an inexpensive medium of

exchange such as cheques. In fact, a cheque is also considered as the most

developed credit instrument.

4. Remittance of Funds:

Commercial banks, on account of their network of branches

throughout the country, also provide facilities to remit funds from one place

to another for their customers by issuing bank drafts, mail transfers or

telegraphic transfers on nominal commission charges. As compared to the

postal money orders or other instruments, bank drafts have proved to be a

much cheaper mode of transferring money and have helped the business

community considerably.

(II) Secondary banking functions of the commercial banks are also

known as non-banking functions. They perform a multitude of other non-

banking functions which may be classified as:

1. Agency Services, and



2. General Utility Services.

1. Agency Services

Bankers perform certain functions for & on behalf of their clients, as:

a) To collect or make payments for bills, cheques, promissory notes,

interest, dividends, rents; subscriptions, insurance premia, etc. For these

services, some charges are usually levied by the banks.

b) To remit funds on behalf of the clients by drafts or mail or telegraphic

transfers.

c) To act as executor, trustee and attorney for the customer’s will.

d) Sometimes, bankers also employ income-tax exporters not only to

prepare income-tax returns for their customers but also to help them to get

refund of income-tax in appropriate cases.

e) To work as correspondents, agents or representatives of their clients.

Often, bankers obtain passports, traveller’s tickets, secure passages for

their customers, and receive letters on their behalf.

2. General Utility Services

Modern commercial banks usually perform certain general utility

services for their community, such as:

a) Letters of credit may be given by the banks at the behest of the importer

in favour of the exporter.

b) Bank drafts and traveller’s cheques are issued in order to provide

facilities for transfer of funds from one part of the country to another.

c) Banks may deal in foreign exchange or finance foreign trade by

accepting or collecting foreign bills of exchange.



Shares floated by government, public bodies and corporations may be

underwritten by banks;

d) Certain banks arrange for safe deposit vaults, so that customers may

entrust their securities and valuables to them for safe custody.

e) Banks also compile statistics and business information relating to trade,

commerce, and industry. Some banks may publish valuable journals or

bulletins containing research on financial, economic and commercial

matters.

Commercial Banks Play an Important Role in a Modern Economy

1) They constitute the very life-blood of modern trade, commerce &

industry, as they provide the necessary funds for their working capital such

as to buy raw materials, to pay wages, to incur current business expenses in

marketing of goods, etc

2) These banks encourage people’s savings habit through their various

savings deposit schemes.

3) They also mobilize idle saving resources from households to business

people for productive use.

4) They transmit money from place to place with economy and safety.

5) Their agency services are, no doubt, of immense value to the people at

large, as they case their difficulties, save their time & energy &provide them

safety & security.

NATIONALISATION OF COMMERCIAL BANKS

By the 1960’s, the Indian banking industry has become an important tool to

facilitate the development of the Indian economy. With effect from July 19,



1969, 14 largest commercial banks were nationalized. A second dose of

nationalization of 6 more commercial banks followed in 1980. The stated

reason for the nationalization was to give the government more control of

credit delivery. With the second dose of nationalization, the GOI controlled

around 91% of the banking business of India. After this, until the 1990’s the

nationalized banks grew at a place of around 4%, closer to the average

growth rate of the Indian economy. So, these nationalization of banks was

carried out with the aim of ‘removal of control by a few’ and to bring about

a more optimal allocation of bank funds. After nationalization, the credit

policy of public sector banks underwent a radical change, with special

emphasis being placed on credit to priority sectors including agriculture,

small scale industry and programmes for poverty alleviation.

The main objectives of nationalization were as follows:

1. To introduce social banking by directing bank funds at concessional

rates to the weaker sections of societ for productive purposes.

2. To prevent monopolies in the banking sector caused due to use of

major share of funds by a few private entrepreneurs.

3. To introduce & promote banking facilities in backward areas & reduce

regional disparities in branch expansion and growth of banking.

4. To expand the role of Commercial banking in agricultural credit.

PERFORMANCE OF COMMERCIAL BANKS IN THE POST - NATIONALIZATION PERIOD

1. Achievements :



(a) Lead Bank Scheme: After nationalization, it was felt that banks should

be allotted particular districts where they would take the lead in studying the

need and scope for banking development. Under the scheme, districts were

allotted to the State Bank Group, 14 nationalised banks and 3 private banks.

Each bank was assigned the status of ‘lead bank’ in a particular district. The

lead bank had to study and understand the socio-economic condition of the

district and undertake surveys for this purpose. Through the surveys the lead

bank would collect useful information about the credit needs, development

needs and pattern of production and nature of employment in the district.

After such information was gathered, the lead bank would then plan and

implement development programmes in the area, with the help of other

banks and financial institutions. This scheme was a unique experiment and it

helped in branch expansion, deposit mobilization and expansion of priority

sector lending.

(b) Branch Expansion: After nationalization, there was massive expansion

of bank branches, especially in the rural areas. The Lead Ban k scheme

played played a major role in this. During the first fifteen years after

nationalization, branches expanded at about 2,400 per year. Total number of

bank branches has increased from 8262 in 1969 to 67,283 in 2007.

Over 80% of bank offices are located in backward states and in semi-urban

areas and rural areas. This, to some extent took care of regional imbalance in

the spread of banking.

(c) Deposit Mobilization: As a result of expansion of banking facilities,

there was a large increase in deposits. In 1969, deposits amounted to 13% of

the GDP, by 2004 this ratio increased 350 times. The increase in rural



deposits as production of total has been from 3% to 15%. Bank deposits

now constitute about 40% of financial assets held by households.

(d) Bank Lending: Traditionally, banks in India had concentrated in

providing working capital to industry and trade. Only after nationalization,

loans are being given for agricultural operations. Bank credit stood at Rs. 3,

399 crore in 1969. In the next 3 decades, his increased by about 200 times.

In 1968, large and medium industries accounted for about 200 times. In

1968, large and medium industries accounted for about 60% of aggregate

bank credit. Agriculture accounted for about 2%. This changed drastically

after nationalization and bank credit to priority sector, including agriculture

was close to 40% of total credit.

(e) Directed Credit Programmes: A major objective of bank

nationalization was to make bank credit available the priority sector,

comprising of agriculture, small scale industries, exports, transporters and

small traders at concessional rates. This system of directed bank credit was

expected to contribute to contribute to economic growth as well as social

justice. Success was achieved in this direction after nationalization.

2. Shortcomings:

(a) Inadequate Banking facilities: Despite achievements in branch

expansion, banking facilities continue to remain inadequate to meet the



needs of the large population. The national average population per bank

branch is still very high at about 12000. This ratio is higher than the national

average in some states like Bihar, Orissa, West Bengal and Madhya Pradesh.

Banking facilities are still not equitably distributed among all states.

(b) Inadequate Deposit Mobilization: Banking habits of people in India

are still not very good. A large part of the population still prefers to carry out

transactions in cash and is not covered by the banking system . Therefore,

there is a large scope for further increasing deposits and brings in more

money in the banking system.

(c) Inadequate lending: Even though there has been significant increase

in lending to priority sectors, it is still inadequate in comparison to the needs

of these sectors. Because of these small farmers and traders have to still

depend on the unorganized sector for meeting their credit requirements.

(d) Increased Expenditure: After nationalization, there has been

significant increase in expenditure on banking operations. This is due to

aggressive and sometimes irrational branch expansion. There has been over-

staffing in nationalized banks and some of their operations in rural areas are

simply not economically feasible.

(e) Low Level of Efficiency: Public sector banks have suffered from lack

of proper supervision and control. Due to high degree of political

interference and lack of competition, these banks have become highly

insufficient. There work culture was poor compared to private sector banks.



However, this scenario has now changed with these banks becoming more

profit oriented and autonomous.

Thus, nationalization of Commercial banks was done with the

objective of social and economic development. But this resulted in several

problems and desortions in the banking system. Till 1990s public sector

banks operated with low profitability and efficiency. In early 1990s, the

government implemented the Narsimham Committee Recommendations in

order to bring about much needed reforms in the banking sector. Since then,

the sector has been performing with higher profitability and efficiency.

TYPES OF COMMERCIAL BANKS:

Scheduled banks

Non- Scheduled Banks



- Scheduled Banks:

A scheduled bank is one which is registered in the second schedule of the

Reserve Bank of India. The following conditions must be fulfilled by a bank

for inclusion in the schedule:

i) The banker concerned must be in business of banking in India;

ii) It is either a company defined in Section 3 of the Indian Companies

Act, 1956, or corporation or a company incorporated by or under any law in

force in any place outside India or an institution notified by the central

government in this behalf;

iii) It must have paid-up capital and reserves of an aggregate role of

exchangeable value of not less than rupees five lakhs;

iv) It must satisfy the Reserve Bank of India that its affairs are not

conducted in a manner detrimental to the interests of its depositors.

Scheduled banks come under the purview of the various credit control

measures of the Reserve Bank of India. They are required to maintain a

certain minimum balance in their accounts with the RBI, and do certain

things prescribed by law. The Scheduled banks are entitled to borrowings

and rediscounting facilities from the RBI. These are similar to the member

banks of the U.S.A.

- Non- Scheduled Banks:

Banks, which are not included in the Second Schedule of the RBI, are

known as non-scheduled banks. They may be classified into 4 groups:



a) Banks with paid-up capital and reserves in excess of Rs. 5 lakhs;

b) Banks with paid-up capital and reserves ranging between Rs.

50,000 and one lakh of rupees;

c) Banks with paid-up capital and reserves ranging between one lakh

of rupees and 5 lakhs;

d) Banks with paid-up capital and reserves below Rs. 50,000.

Non- Scheduled banks are not entitled to all those facilities that the

scheduled banks avail of from the Reserve Bank of India. Since the

enactment of the Banking Regulation Act in 1949, non-scheduled banks

have also come under the ambit of the RBI control. It has become obligatory

on the part of these banks to carry a portion of their deposits with the RBI or

in the vault with the bank itself, and prepare their annual accounts and

balance sheets in accordance with the requirements stipulated in Section 29

of the Banking Companies Act.

Scheduled Banks may be classified into two groups: Indian Scheduled

Banks and Foreign Scheduled Banks. The Indian Scheduled Banks are those

which have their registered officers in India and are registered in the second

schedule if the RBI. As against this, foreign scheduled banks comprise those

commercial banks which are registered in the said schedule but have their

registered offices outside India. These banks have played a prominent role in

India’s foreign trade; in fact, they had complete sway in this sphere until the

Second World War. Since then, a number of leading Indian scheduled banks

entered the field of foreign trade and have in the course of time achieved an

important position in this field.

Indian scheduled banks may be distinguished in two broad sectors:



a) Public sector commercial banking comprising the State Bank of

Indian and its subsidiaries and the twenty nationalized banks;

b) Private sector commercial banking comprising all the other Indian

scheduled banks that do not fall in the above group.

COMMERCIAL BANKS IN INDIA



As part of the financial services industry, insurance, commercial banking,

and capital markets companies worldwide are attempting to compete better

by improving core operations and differentiating the customer experience.

However, this is not easily achieved because of the volume of business

challenges financial services companies deal with today.

Names of Banks providing Commercial Banking services in India :



o ABM AMRO India

o Abu Dhabi Commercial Bank (India)

o Allahabad Bank

o Andhra Bank

o Bank of Baroda

o Bank of India

o Bank of India U.S operation

o Bank of Punjab

o Bank of Madura

o Bank of Maharashtra

o Canara Bank

o Centurion Bank of Punjab

o Corporation Bank

o DCB (Development Credit Bank Ltd.)

o Dena Bank

o Deutsche Bank India

o Dhanalakshmi Bank

o Federal Bank

o HSBC in India

o ICICI Bank

o Indus Bank Ltd.

o State Bank of India, etc.



Services typically offered by Commercial Banks

Although the basic type of services offered by a

commercial bank depends upon the type of bank and

the country, services provided usually include:

- Taking deposits from their customers and issuing current (UK) or

checking (US) accounts and savings accounts to individuals and

businesses.

- Extending loans to individuals and businesses; Cashing cheques

- Facilitating money transactions such as wire transfers and cashier's

checks

- Issuing credit cards, ATM cards, and debit cards

- Storing valuables, particularly in a safe deposit box

- Cashing and distributing bank rolls

- Consumer & commercial financial advisory services

- Pension & retirement planning.

Financial transactions can be performed through many different channels:

- A branch, banking centre or financial centre is a retail location where

a bank or financial institution offers a wide array of face to face

service to its customers.

- ATM is a computerised telecommunications device that provides a

financial institution's customers a method of financial transactions in a

public space without the need for a human clerk or bank teller.

- Mail is part of the postal system which itself is a system wherein

written documents typically enclosed in envelopes, and also small


http://en.wikipedia.org/wiki/Mail

http://en.wikipedia.org/wiki/Automatic_teller_machine

http://en.wikipedia.org/wiki/Channel_(marketing)

http://en.wikipedia.org/wiki/Financial_transaction

http://en.wikipedia.org/wiki/Retirement

http://en.wikipedia.org/wiki/Pension

http://en.wikipedia.org/wiki/Financial_advice

http://en.wikipedia.org/wiki/Bank_roll

http://en.wikipedia.org/wiki/Safe_deposit_box

http://en.wikipedia.org/wiki/Debit_card

http://en.wikipedia.org/wiki/ATM_card

http://en.wikipedia.org/wiki/Credit_card

http://en.wikipedia.org/wiki/Cashier's_check

http://en.wikipedia.org/wiki/Cashier's_check

http://en.wikipedia.org/wiki/Wire_transfer

http://en.wikipedia.org/wiki/Cheque

http://en.wikipedia.org/wiki/Loans

http://en.wikipedia.org/wiki/Savings_account


packages containing other matter, are delivered to destinations around

the world.

- Telephone banking is a service provided by a financial institution

which allows its customers to perform transactions over the telephone.

- Online banking is a term used for performing transactions, payments

etc. over the Internet through a bank, credit union or building society's

secure website.

DEBIT CARD CREDIT CARD MAIL

ATM ONLINE BANKING TELEPHONE BANKING


http://en.wikipedia.org/wiki/Online_banking

http://en.wikipedia.org/wiki/Telephone_banking

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http://in.wrs.yahoo.com/_ylt=Ak_nPQgz7tQLI_nnGlMb4UO9HAx.;_ylu=X3oDMTBqb2xianJjBHBvcwM3OARzZWMDc3IEdnRpZAM-/SIG=1fiv4n3bq/**http%3A/in.images.search.yahoo.com/search/images/view%3Fback=http%253A%252F%252Fin.images.search.yahoo.com%252Fsearch%252Fimages%253Fp%253Dtelephone%252Bbanking%2526ei%253DUTF-8%2526fr%253Dsfp%2526b%253D61%26w=197%26h=173%26imgurl=www.bridgewatersavings.com%252Fimages%252FSERVICES%252Ftelephone.jpg%26rurl=http%253A%252F%252Fwww.bridgewatersavings.com%252Ftelephone.html%26size=6.3kB%26name=telephone.jpg%26p=telephone%2Bbanking%26type=jpeg%26no=78%26tt=2,607%26oid=44e0e321d60ee54c%26ei=UTF-8


EFFECT OF COMMERCIAL BANKING ON BUSINESS AND

INDUSTRY IN INDIA

he term Commercial Bank is not meant only for Business and

industry. Commercial bank is meant primarily for personal

banking and secondarily for commercial developments. The banks

looking mainly deposits from public and lending small and short term loans

to public and short businessmen.

TBanking sector is called the “Nerve centres of the nation's economy” and

“Backbones of modern Industries and Commerce”. A minor change in the

basis points by the nation's central bank can make a huge impact on the

1. nation's production and

2. inflation.

Commercial banks facilitate the growth of the business. Be it rural small

scale (Cottage industries) or Very large scale investments. The deposits

from public is mobilised to fund the commercial activities. These activities

in turn generate income which is added to the gross domestic product of

the nation. Thus, banks are the most crucial sector that helps a nation grow

economically.



CHALLENGES BEFORE INDIAN COMMERCIAL BANKS

Major challenges which Indian commercial banks are facing today and which are likely to be more poignant in the ensuing years in view of the irreversible process of the reforms and resultant verisimilitude of more players entering the banking sector are discussed below.

Problem of pressure on profitability:The greatest challenge which PSBs are facing in recent years arises

out of pressure on their profitability. With continuous expansion in number

of branches and manpower, thrust on social and rural banking, directed

sector lending, maintenance of higher reserve ratios, waiver of loans under

ARDR-type concessions, repayment defaults by large industrial corporate

and other borrowers etc. had their telling impact on the profitability of the

banks.

Further with the introduction of prudential norms, to be effective from

March 1993 a majority of the commercial banks balance sheets had shown

huge losses. In order to improve financial health of these banks the

Government provided a dose of hybrid capital and in return these banks

were made to sign a memorandum of understanding with RBI. Accordingly,

the focus of operation of banks shifted from deposit mobilization to services

marketing. Further, accent of banks operation shifted to non-fund based

business with an eye on capital adequacy achievement and other ancillary

business which may cross subsidize the cost of certain unremunerative

services, the banks have to offer.


http://images.google.co.in/imgres?imgurl=http://www.it.iitb.ac.in/~prathabk/egovernance/img/challenges.gif&imgrefurl=http://www.it.iitb.ac.in/~prathabk/egovernance/challenges.html&h=231&w=244&sz=21&hl=en&start=1&tbnid=YvNo8yp6RrFlyM:&tbnh=104&tbnw=110&prev=/images%3Fq%3DCHALLENGES%26gbv%3D2%26svnum%3D10%26hl%3Den%26sa%3DG


Problem of low productivity:

Another furious challenge which indian commercial banks are

confronting is low productivity. The low productivity has been due to huge

surplus manpower, absence of good work culture, andbabsence of

employees commitment to the organization. .

The management have continued to prefer not to see the problem in its

proper perspective due to the fear of strong unions. They have camouflaged

the issue by diverting their attention to such apparent face saving devices

like redeployment, repositioning , retraining, etc.. There are various ways of

minimizing the size of the staff, such as voluntary retirement scheme or

golden shakehand. The problem before the management at present is how to

cut size of the staff and improve productivity of the bank.

Problem of Non-Performing Assets(NPA):

A serious threat to the survival and success of Indian banking

system is uncomfortably high level of non-performing assets. In its Report

on trend and Progress of banking In India, 1997-98, the RBI reported that

gross NPAs as percentage of advances of PSBs was 16 percent as on March

31, 2000 with a colossal amount of about Rs. 52,000 crore being locked up.

This might have recently recorded further increase due to default in

repayment by the industrial units affected by the two-year old recession.

This is much higher than the international level of below 5%. Spiraling non-

performing assets are hurting bank’s profitability and even the basic inability

of the banking system by way of both non-recognition of interest income

and loan loss provisioning.



Problem from customers:

In view of unleashing of competitive forces and fast changing

life styles and values of customers who are now better informed and more

sophisticated and discerning and who have a wide choice to choose from

various banking and non-banking intermediaries have become more

demanding and their expectations in terms of products, delivery and price

are increasing, the PSBs lacking in customers’ orientation are finding it

difficult to even retain their highly valued customers what to talk of

attracting the new clients particularly when the foreign banks are also the

new breed of private sector banks have embarked upon aggressive marketing

programme aiming at niche markets. The telebanking, anywhere banking,

virtual or internet banking, ATM, credit cards and newly introduced interest

rate swap, forward rate agreements, etc. are some of the products innovated

by the new players. Although the PSBs are trying to computerize their

operations, the pace of progress in this direction has been decidedly slow.

The rather tardy progress in the area has been due to the initial reservation of

the staff unions against computerization for the lurking fear of employment

cut, as also the existence of huge number of branches in the rural areas,

where suitable logistics are not available. Market share of PSBs both in

deposits and lending has declined. This has already become a serious cause

of concern for PSBs regulating strategic efforts for thwarting the challenges

from the new players.

Competition from New Banks:

The commercial banks in India which enjoyed monopoly position

until recently are facing perilous challenges particularly on quality, cost and

flexibility fronts from the newly emerging players who by dint of their



invigorating ambience and work culture supported by pragmatic leadership

committed, courteous, affable and trained staff and modern ultra gadgets are

offering excellent customers services and making inroads in the business

centres.

The new banks have set the tone and to extent also the standard for

technological improvements and product innovations which the vastly

dominating PSBs will have to bring about in their own operations if they

have to maintain their present position of dominance.

For instance, Bank of Punjab has opened a new savings bank product-swagat

with a minimum balance requirement . HDFC has launched q new retail

account-Freedom-for customers who would be using the non-branch

infrastructure of the bank like ATM, phone banking and internet banking .

The ICICI Bank has product offerings tailor-made to specific categories of

customers, such as students, traders, NRIs as well as the salary customers.It

is going to offer a special scheme for senior citizens.

By resorting to latest methods in human resources management as

well as information technology, the new entrants in the field have suddenly

sensitised even the ordinary user of the banking services in India to the type

and quality of services he can expect from his bank.

The market has become highly competitive and largely customers

centric. This calls for an ability to reach the client at his door step and meet

his requirements of products and services in a customized manner. The race

for customers could at times lead to adverse selections. This situation

demands aggression laced with caution, in turn, calls for highly efficient

management by the banks of both liabilities and assets.



These banks have to work in a market which will not know any

geographical barriers and therefore will have to develop abilities of product

innovation and delivery comparable to the best in the world.

Competition from global majors

Globalization and integration of Indian financial market with world

and the consequent entry of foreign players in domestic market has infused,

in its wake, brutal competitive pressure on the Indian commercial banks.

Foreign players endowed with robust capital adequacy, high quality assets,

world-wide connectivity, benefits of economies of scale and stupendous risk

management skills are posing serious threats to the existing business of the

Indian banks. In order to compete successfully with the new entrants, Indian

banks need to possess matching financial muscle, as fair competition is

possible only along the equals. Average size of an Indian bank is niggardly

low in comparison to a foreign bank. The question before the major Indian

Commercial Banks, therefore, is how to acquire competitive size.

Problem of Managing Duality of Ownership: Managing duality of

ownership is a peculiar problem which the PSBs have to encounter because

of participation of the private shareholders in their capital. A public sector

bank to survive and grow successfully is expected to operate according to

the expectations if one of its principal shareholders. In the changed scenario,

there would be two major groups of shareholders, viz., the government of

India and RBI on the one hand and the private shareholder, on the other.

Since the expectations of these two categories of owners are not necessarily

identical, the bankers will have to manage conflicting interests.



OPPORTUNITIES FOR INDIAN COMMERCIAL BANKS

Challenges are the driving forces that keep on going.

They prevent us from being vagary because they also bring

in their wake opportunities. In fact, challenges &

opportunities are like healthy twins, knocking at our door

steps. The process of globalization and liberalization have

thrown open tremendous opportunities for the banks in terms of widening of

scope of business, greater freedom to operate in financial markets – both

national and international freedom to deloy relatively largest funds because

of reduction in preemption requirements. The Commercial banks are now

enjoying greater autonomy in reviewing & revising existing branch network

& greater discretion to reduce amplitude of cross subsidization to priority

sector.

Indian Commercial banks have also got the autonomy in respect of

pricing of bank products. In the regulated regime, interest’s rates on both

deposits and advances of Commercial banks were tightly regulated and so

was the product range. With gradual deregulation of interest rates, banks are

blessed with more power in pricing and structuring their products.

As we know, Commercial banks are in the business of providing

banking services to individuals, small businesses and large organizations.

While the banking sector has been consolidating, it is worth noting that far

more people are employed in the commercial banking sector than any other

part of the financial services industry. Jobs in banking can be exciting and

offer excellent opportunities to learn about business interact with people and

build up a clientele. If you are well-prepared and enthusiastic about entering

the field, you are likely to find a wide variety of opportunities open to you.



STRENGTHS OF INDIAN COMMERCIAL BANKS:

Indian commercial banks possess the following strengths which are distinct

from others:

i. Tremendous branch network giving an access to almost entire spectrum

of customers

ii. High market coverage

iii. Diversified operations

iv. Intimate knowledge of local environment

v. High class human resource pool

WEAKNESS OF INDIAN COMMERCIAL BANKS:

Indian commercial banks have been ailing from the following weakness

because of which they are finding it to difficult to out beat the new players

and exploit the emerging opportunities:

i. Lower Profitability

ii. High Operating Costs

iii. High NPAs

iv. Low Productivity

v. High Provisioning

vi. Complex and Non- responsive organizational structure

vii. Poor asset management

viii. Inadequate HRD strategy

ix. Low work culture

x. Action flippant and inward looking management and employees

xi. Strong, militant and non-responsive unions

xii. Limited automation.



BASIC PROBLEM OF A COMMERCIAL BANK

The basic problem facing a bank manager is to have a satisfactory

trade off between liquidity and profitability - the two principal but

conflicting goals of a bank. A bank deals in the money of the people. The

success of the business of a bank depends partly on the efficiency with

which it can provide services to its creditors (depositories), but mainly on

the confidence it inspires among the depositors. It has been able to attract the

deposits of the people not only by promising some returns on their money

but also by committing itself to repayment on demand. This is why the

public accepts bank deposits as being “as good as cash.” The banker must,

therefore, ensure an adequate amount of liquidity in his assets so that he may

be able to meet any claims upon it in cash on demand. The perfectly liquid

asset is cash itself because it can fully satisfy the depositors’ claims. The

more cash a banker holds, the more obviously he can, without difficulty of

any kind, offer cash in exchange for deposits. Further, the banker with an

adequate amount of cash in hand can meet the credit needs of the community

and can make speculative gains. However, cash is a sterile asset which earns

no income at all. A banker cannot afford to ignore income because the

ultimate object of a bank is to make earnings on its business which are

sufficient to compensate it for the cost which it incurs on raising funds,

besides paying the wages of the staff and meeting other expenses. If a

banker holds a large portion of his funds in ready cash without earning any

income on it, his business will result in losses, and sound the death-knell of

the bank after some time. He must therefore, employ the bulk of the bank’s

resources in giving loans and advances, and in investing them in high-

yielding securities. Such investments are, however, subject to credit risk –



the risk arising from default in repayment money lent out and the money rate

risk – the risk arising out of fluctuations in the market rate of interest. The

banker will not be able to satisfy the cash requirements of the depositors on

demand with the funds deployed in the other investments. Once the

depositor’s cheques are not honored, the bank will lose the confidence of the

public, which will result in a mass run on the bank’s counters and jeopardize

the liquidity position of the bank. Ultimately, the very survival of the bank is

endangered.

Liquidity and profitability are, therefore, inimical to each other. Cash

has perfect liquidity but lacks yield. At the other ends are some loans and

investments which yield a high rate of interest, but are hardly liquid at all.

The conflict between liquidity and income is not as sharp as it appears. In

order to ensure long-run earnings, the commercial bank must retain public

confidence in order to continue to survive and provide for the liquidity needs

of the bank.

The art of commercial banking lies in the resolution of the conflicts

between liquidity and profitability. “It is an art because science ha not

furnished inviolable rules; banks must be managed with discrimination and

good judgement. Rules and scientific procedures for doing the whole job

cannot be framed.”1 A number of approaches, ways and means of resolving

the conflicts have been developed from time-to-time. These approaches

subsequently came to be known as theories of liquidity management.



BANK DEPOSITS AND THEIR STRUCTURE:

Commercial banks being repositories of deposits have played

significant role in garnering savings of the people particularly after their

nationalization, as is evidenced from Table below. It may e noted from the

Table that bank deposits boomed by over Rs. 7,84,000 crores between 1947

and 20003. There was acceleration in deposit mobilization after

nationalization of banks. This was because of tremendous branch expansion,

growth in interest rates and introduction of innovative deposit schemes. As a

result, per capita deposits to national income rose significantly from 15.5%

as on June 1969 to over 41% as at the end of July 2000.

Amount of bank deposits soared to Rs. 9, 91,318 crore as on May 4, 2001

with per capital deposits of the order of Rs. 9,900.

Deposits of Commercial Banks during 1947- 2007

Year Amount in

crore of Rs

Per capita

Deposits (Rs.)

Deposits as or of

National Income

As on December

1947

1,080 32 NA

June 1969 4,661 44 15.5

June 1976 15,255 1,198 22.8

June 1986 92,233 2,368 41.5

March 1991 2,00,569 5,402 42.1

March 1997 5,03,596 7,157 41.0

Dec. 2000 6,79,894 7,617 42.6

Sept. 2003 7,61,678 7,851 42.4

July, 2005 7,85,165 9,900 41.0

May, 2007 9,91,318 9,900 NA



ASSET-LIABILITY MANAGEMENT (ALM)

In the recent past, banks in India have started using the Asset-Liability

Management (ALM) as the technique or strategy for financial management.

ALM aims at planning, directing, and regulating the levels, changes, mixes

of assets and liabilities of banks in the short-run, usually three to twelve

months, with a view to enable them to achieve their long-term objectives.

The net interest margin and its variability are the focus of its attention so as

to maximise Return On Equity (ROE), and to minimise fluctuations in ROE.

It also links capital, non-interest income and expenses, and strategic choices

regarding products, markets, and bank structure. ALM involves giving

balanced emphasis necessary in a competitive environment characterised by

deregulatiom. and greater viability (volatility) of interest rates, variable rates

pricing, and the use of interest rates derivatives.

ALM is an integrated strategic managerial approach of managing a total

Balance Sheet dynamics having regard to the size and quality in such a way

that the net earnings from interest are maximized. This is done by matching

of liabilities and assets in terms of maturity, cost and yield rates.

The focus of ALM is not to build up deposits and loans/assets in isolation,

but on net interest income and recognizing interest rates and liquidity risks.

Thus, ALM is essentially a guide for survival of a bank in deregulated

environment.

Diagramatic presentation of ALM is brought out in the following

chart:


Asset Management

Asset-Liability Management

General

Specific

Asset, Liability & Capital Management

Financial

Balance Sheet Management

Income & ExpenditureManagement

Liability Management


Asset-Liability Management Structure

- Objectives of ALM

Primary objective of ALM approach is to manage market risk in such away

as to minimize the impact of net interest income fluctuations in the short run

and protect the net economic value of the bank in the long run. Precisely

speaking, ALM has the following objectives:



1. To control the volatility of net interest income and net economic value

of a bank.

2. To control volatility in all target accounts .

3. To control liquidity risk, and

4. To ensure an acceptable Balance profitability and growth rate.

- ALM And Commercial Banks:

1) Reformed process in India has emerged mew players, new instrument

and new products at competitive rates has increased banks risks.

2) This new development forced the Commercial banks to take a re-look

on ALM to remain competitive & withstand the risk.

3) RBI also advised Commercial Banks to tighten their Asset-Liability

management and to furnish data in a format outlined by it.

In the recent past, banks in India have started using the Asset-Liability

Management (ALM) as the technique or strategy for financial management.

ALM aims at planning, directing, and regulating the levels, changes, mixes

of assets and liabilities of banks in the short-run, usually three to twelve

months, with a view to enable them to achieve their long-term objectives.

The net interest margin and its variability are the focus of its attention so as

to maximise Return On Equity (ROE), and to minimise fluctuations in ROE.

It also links capital, non-interest income and expenses, and strategic choices

regarding products, markets, and bank structure. ALM involves giving

balanced emphasis necessary in a competitive environment characterised by

deregulatiom. and greater viability (volatility) of interest rates, variable rates

pricing, and the use of interest rates derivatives.



BANKS BALANCESHEET & PORTFOLIO MANAGEMENT

Conventionally, banks publish balance sheets in their annual reports. The

balance sheets contains particulars of a Bank’s current assets and current

liabilities. Assets items refer to all credit items in indicating the wealth and

claims possessed by the bank. Liability items refer to all debit items

indicating the obligations of the bank. Thus, the balance sheet indicates the

manner in which the bank has raised funds and invested them in various

types of assets. It is the means by which the banks financial position – its

solvency and liquidity – is judged. There is, of course the equity of assets

and liabilities in the balance sheet of a bank, as in the case of any other

balance sheet.

In a balance sheet, it is customary to state the liabilities on the left and assets

on the right. The liabilities of the banks are the items which are to be paid by

it either to its shareholders or depositors. The assets of the banks are those

items fro which it hopes to get an income. Thus, the assets include all the

amounts owed by others to the bank.

A much simplified format of a bank’s balance sheet may be illustrated as

follows:



The Format of Balance Sheet of A Bank

Liabilities Assets1. Share capital

2. Reserve Funds

3. Deposits:

a) Time deposits

b) Demand deposits

c) Savings deposits

4. Borrowings

5. Other items

1. Cash in hand

’’ with central bank

’’ with other banks

2. Money at call and short notice.

3. Bills discounted, including treasury bills.

4. Investments

5.Advances

6.Other Items

- Objectives of portfolio management:

A commercial bank has to manage its assets and liabilities with three

considerations in mind namely, liquidity, profitability and solvency.

Liquidity means the capacity of the bank to give cash on demand in

exchange for deposits. But since a bank is a commercial concern, it aims at

profitability. Profits come from the income accruing from the assets the bank

holds. The banker must arrange hiss assets in such a way that he makes more

income. Hence, in acquiring assets, the banker will be influenced by the

consideration of profit. A bank acquires assets mainly out of the deposits of

the public. Public confidence in the bank, however, depends on the belief

that the bank will always be able to exchange deposits for cash. A bank,

therefore, must keep a sufficient amount of cash balance to meet the actual

demand, while for meeting the potential demand, it has to keep its assets

sufficiently liquid. Cash has perfect liquidity, but yields no returns at all,

while other income-yielding assets such as loans are profitable but have no



liquidity. Liquidity and profitability are, therefore, conflicting consideration

for the bankers.

Another consideration of the bank is its solvency and security. This refers to

the liquidity and shift ability of assets. Liquidity is the capacity to produce

cash on demand. Shift ability means that type of assets acquired by a bank

be easily shift able to other banks or to the central bank. Therefore a banker

will prefer securities which can be quickly disposed of and which are easily

shift able without any loss to the bank or to those which are highly risky but

more profitable. But a bank is liquid only to the extent that it can turn its

assets into cash to meet the demands of depositors and other creditors.

Thus, the two motives of a banks liquidity and profitability are

contradictory, but have to be reconciled. A good banker is one who follows a

wise investment policy and distributes the assets in such a way both the

requirements of liquidity and profitability are satisfied. The assets should

bring in maximum profit and should provide maximum security to the

depositors. The secret of success of a bank lies in striking a sound balance

between liquidity and profitability.

In reading a balance sheet of a bank, we have to examine the liabilities and

assets portfolios which reveals how best the two objectives of liquidity and

profitability have been reconciled by the banker.



o Liabilities Portfolio

The liabilities portfolio of a bank is comparatively simple. It shows how the

bank raises funds. Every commercial bank usually gets its funds in three

ways: by share capital, reserve fund and deposits from the general public.

For instance, liabilities may be incurred by accepting or endorsing bills of

exchange on behalf of customers.

o Assets Portfolio

The assets portfolio of the bank is both complex and interesting. It

represents more faithfully the varied nature and ramification of the banks

functions and investment policies.

In fact the asset side of the balance sheet indicates the manner in

which the funds entrusted to the bank are deployed. Usually, every banker

seems to arrange its assets in an ascending order of profitability and

descending order of liquidity. Thus, the structure of a balance sheet indicates

assets appearing in the descending order or liquidity.



OVERVIEW OF ICICI BANK & SBI BANK

ICICI Bank is India's second-largest bank with total assets of Rs.

3,446.58 billion (US$ 79 billion) at March 31, 2007 and profit after tax of

Rs. 31.10 billion for fiscal 2007. ICICI Bank is the most valuable bank in

India in terms of market capitalization and is ranked third amongst all the

companies listed on the Indian stock exchanges in terms of free float market

capitalization. The Bank has a network of about 950 branches and 3,300

ATMs in India and presence in 17 countries. ICICI Bank offers a wide range

of banking products and financial services.

The origin of the State Bank of India goes back to the first decade of the

ninet eenth century with the establishment of the Bank of Calcutta in

Calcutta on 2 June 1806 and three years later, it was re-designed as the Bank

of Bengal (2 January 1809). A unique institution, it was the first joint-stock

bank of British India sponsored by the Government of Bengal. The Bank of

Bombay (15 April 1840) and the Bank of Madras (1 July 1843) followed the

Bank of Bengal. These three banks remained at the apex of modern banking

in India till their amalgamation as the Imperial Bank of India on 27 January

1921.


http://images.google.co.in/imgres?imgurl=https://infinity.icicibank.co.in/salesEARWeb/web/rbi/images/logo.gif&imgrefurl=https://infinity.icicibank.co.in/salesEARWeb/web/rbi/jsp/complaintForm.jsp&h=99&w=207&sz=5&hl=en&start=5&tbnid=dJ_F6SxrUF7OQM:&tbnh=50&tbnw=105&prev=/images%3Fq%3Dlogo%2Bof%2Bicici%2Bbank%26gbv%3D2%26svnum%3D10%26hl%3Den%26sa%3DG

http://images.google.co.in/imgres?imgurl=http://www.apitco.org/images/sbi_logo.jpg&imgrefurl=http://www.apitco.org/our_promoters.html&h=134&w=134&sz=3&hl=en&start=48&tbnid=vUPZo2guL0MgjM:&tbnh=92&tbnw=92&prev=/images%3Fq%3Dlogo%2Bof%2BSBI%2B%2Bbank%26start%3D36%26gbv%3D2%26ndsp%3D18%26svnum%3D10%26hl%3Den%26sa%3DN

India

’s largest private

sector bank and one stop financial solutions provider with a diversified and de

-risked business

model

India

’s largest private

sector bank and one of the top financial solution provider with a diversified and de

-risked business

model

ICICI Bank today Large capital

base Vast talent

pool Low operating

costs Technology

focus Strong

corporate relationships




Performance of ICICI Bank

ICICI Bank, India's largest bank in the private sector. It is India's second-largest bank with total assets of Rs. 3,446.58 billion at March 31, 2007. ICICI Bank is the most valuable bank in India in terms of market capitalization.The Bank has a network of about 950 branches and 3,300 ATMs in India and presence in 17 countries. ICICI Bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialised subsidiaries and affiliates in the areas of investment banking, life and non-life insurance, venture capital and asset management. The Bank currently has subsidiaries in the United Kingdom, Russia and Canada, branches in Singapore, Bahrain, Hong Kong, Sri Lanka and Dubai International Finance Centre and representative offices in the United States, United Arab Emirates, China, South Africa, Bangladesh, Thailand, Malaysia and Indonesia. Our UK subsidiary has established a branch in Belgium.

ICICI offers various products and services in India in areas of commercial banking, online stock trading, loans (home, auto, personal etc), insurance, foreign exchange trading and mutual funds. It also offers services to non-resident Indians like money transfer, NRE and NRO savings accounts and certain investment options as well.


http://www.icicibank.com/pfsuser/icicibank/ibank-nri/nrinewversion/Accounts_other_NREsavings.htm

http://www.icicibank.com/pfsuser/icicibank/ibank-nri/nrinewversion/Accounts_other_NREsavings.htm


MAIN BRANCH OF STATE BANK OF INDIA, PANAJI


http://images.google.co.in/imgres?imgurl=http://www.onlinesbi.com/sbijava/images/header_2_02.jpg&imgrefurl=http://www.onlinesbi.com/msg_know.html&h=70&w=240&sz=8&hl=en&start=73&tbnid=_V67h1pOgMifXM:&tbnh=32&tbnw=110&prev=/images%3Fq%3Dstate%2Bbank%2Bof%2Bindia%26start%3D60%26gbv%3D2%26ndsp%3D20%26svnum%3D10%26hl%3Den%26sa%3DN

http://images.google.co.in/imgres?imgurl=http://www.sandiegoindia.us/images/sanban.jpg&imgrefurl=http://www.sandiegoindia.us/banks.html&h=226&w=328&sz=70&hl=en&start=4&tbnid=5e5A04-2QuRrbM:&tbnh=81&tbnw=118&prev=/images%3Fq%3Dstate%2Bbank%2Bof%2Bindia%26gbv%3D2%26svnum%3D10%26hl%3Den%26sa%3DG


Performance of State Bank of India (SBI)

SBI is the number one Bank in India and is regarded as India's largest commercial bank, listed in the Fortune 500 among Banks world wide and is having more than 9300 branches world wide (approximately 14% of all bank branches) and commands one-fifth of deposits and loans of all scheduled commercial banks in India. The main Branch Of State Bank Of India is at Panaji, has the unique privilege in Goa to trace back its roots to two centuries of banking. As there was no formal transition either in Government or in banking from Portuguese control, for a time the entire territory of Goa was without any commercial banking facility. In this backdrop, Panaji Branch then became first Branch of a Bank to start functioning in Goa.

The State Bank Group includes a network of eight banking subsidiaries and several non-banking subsidiaries offering merchant banking services, fund management, factoring services, primary dealership in government securities, credit cards and insurance.

The eight banking subsidiaries are:- State Bank of Bikaner and Jaipur (SBBJ)- State Bank of Hyderabad (SBH)- State Bank of India (SBI)- State Bank of Indore (SBIR) - State Bank of Mysore (SBM) - State Bank of Patiala (SBP) - State Bank of Saurashtra (SBS)- State Bank of Travancore (SBT)

The origins of State Bank of India date back to 1806 when the Bank of Calcutta (later called the Bank of Bengal) was established. In 1921, the Bank of Bengal and two other Presidency banks (Bank of Madras and Bank of Bombay) were amalgamated to form the Imperial Bank of India. In 1955, the controlling interest in the Imperial Bank of India was acquired by the Reserve Bank of India and the



State Bank of India (SBI) came into existence by an act of Parliament as successor to the Imperial Bank of India.

Today, State Bank of India (SBI) has spread its arms around the world and has a network of branches spanning all time zones. SBI's International Banking Group delivers the full range of cross-border finance solutions through its four wings - the Domestic division, the Foreign Offices division, the Foreign Department and the International Services division.

FEATURES OF STATE BANK OF INDIA

- Extended Banking Hours- Round the Clock ATM and Telebanking- Attractive Deposit Schemes- The first Branch in operation in Post Liberation Goa- Warm unmatched ambience that you will love- Fully computerized Branch with latest Technological value added services. - Branch with the largest number of Customers among all Banks- The number one Bank in Goa- Part of a group with over a century of banking tradition

Thus, we can conclude that the profit of ICICI bank is much more than SBI bank.



PERFORMANCE HIGHLIGHTS OF ICICI BANK

1% 7%

67%

15% 5% 5%Capital

Reserves & Surplus

Deposits

Borrowings

Cash bal. with RBI

Fixed & other Assets

PERFORMANCE HIGHLIGHTS OF SBI BANK

1% 5%

77%

7%5% 5% Capital

Reserves & Surplus

Deposits

Borrowings

Cash bal. with RBI

Fixed & Other Assets

CASE STUDY OF ICICI BANK & SBI BANK



In spite of all this, the long case on ICICI is compelling. In my opinion, ICICI's earnings growth will continue thanks to the rising middle class income in India. More and more people now have disposable income on their hands to buy car(s), buy houses, invest or just plain deposit in the savings accounts. In speaking to a lot of my friends and family back in India, almost everyone from the younger generation prefers private banks like ICICI or SBI bank.The younger generation does not like government-owned banks because they do not understand the concept of "customer service"-- they treat you like they are doing you a favor by safe-keeping your hard-earned money. Average salary increases in India are currently at 30% and this alone gives people a lot of disposable income at hand.

Competition and personal experienceICICI faces competition primarily from SBI bank, which is another growing bank in the private sector, as well as others like HDFC, Canara bank, and Punjab National Bank. But here we will focus on two banks ICICI and SBI. Also, after having spoken to friends and family back in India, I got the impression that ICICI was more aggressive in terms of its marketing strategies as well as following-up with potential customers. One of my uncle was trying to open up an NRE savings account about a year back, he was exploring options with SBI as well as ICICI. After having emailed both through their respective company websites, he is still waiting on hearing back from SBI, whereas ICICI got in touch with him within 48 hours. This gave me the impression that if SBI bank did not care about a potential customer, it wouldn't care much after we actually became their customer - no points for guessing he finally ended up opening an account with SBI.

ConclusionAll in all, I think ICICI has a very compelling growth story ahead of it as



Indian economy continues to boom as we have seen above by doing analysis of the financial statements which is in the form of Common size, Comparative and Trend analysis.

CONCLUSION:



Friends, as we know, over five decades the Commercial banks in India achieved astounding success by enormously spreading banking services in far-flung and unbanked areas of the country through their massive branch network are garnering burgeoning amount of savings which represent half of the GDP of the country. A major portion of these resources had been deployed to meet the needs of priority sectors which are critical to the economy.

However, it is crucial for the commercial banking industry to meet the increasingly complex savings and financing needs of the economy by offering a wider and flexible range of financial products tailored for all types of customers. In recent years, it is being felt widely that the commercial banking system has not actually grown as sound & vibrant as it needed to be. Strong capital positions and balance sheets places the Commercial banks in a better position to deal with and absorb the economic shocks. These Banks need to face competition without diluting the operating standards.

In banking, there is no such thing as "one size fits all." But today's commercial banks are more diverse than ever. You'll find a tremendous range of opportunities in commercial banking, starting at the branch level because commercial bankers, now are highly experienced in working with businesses to develop the right financial package to meet your unique business needs. The face of Commercial banking is changing rapidly. Competition is going to be tough Banks should avail of the existing and upcoming opportunities as well as address the above-discussed issues if they have to succeed, not just survive, in the changing environment.

Thus, Commercial Banks occupy a dominant place in the money

market, they are like a reservoir into which flow the savings, the idle

surplus, money of households and from which loans are given on interest to

businessmen & others who need them for investment or productive uses.

RECOMMENDATIONS



Banking in India has made a remarkable progress in its growth and expansion, as well as business with social perspective in the fulfillment of national objectives. Indian Commercial banking has developed, but, its perfection is yet to be seen. There still remains many tasks to be fulfilled.

1. Still there are villages left without banking facilities, so many more rural banks branches need to be opened.

2. Quality of Commercial banking facilities should be improved to the atmost satisfaction of the customer.

3. Operational costs of Commercial banks should be reduced to the minimum profitability and working results must be maximized.

4. Banking staff should be adequately trained.5. More lending should be made in favour of priority sectors.6. Malpractices, fraud, corruption and red-tapism must be done away with.7. More attention should be paid to the development of exports.8. Nationalised banks should give more technical assistance to the small

industrialists.9. Interest rates on deposits should be enhanced reasonably up to 12-13 %

so that savers get their legitimate returns. 10. The high level of overdues of banks have become a matter of concern.

So, banks should make all possible efforts to reduce their overdues. This all requires that no loans should be given without proper identification and address of the deserving rural poor.

Thus, in order that the association of banks with industry is more fruitful and rewarding, many innovations have to be planned and introduced systematically and greater degree of managerial competence will have to be developed in Commercial banking sector.

FUTURE PROSPECTS OF COMMERCIAL BANKING:



Indian banking has developed. But, its perfection is yet to be seen. There still remain many tasks to be fulfilled. Historically, profitability from lending activities has been cyclic and dependent on the needs and strengths of loan customers. In recent history, investors have demanded a more stable revenue stream and banks have therefore placed more emphasis on transaction fees, primarily loan fees but also including service charges on array of deposit activities and ancillary services (international banking, foreign exchange, insurance, investments, wire transfers, etc). However, lending activities still provides and in future, too will provide bulk of a Commercial bank's income.

As part of the financial services industry, commercial banking are worldwide attempting to compete better by improving core operations and differentiating the customer experience. The banking sector has been consolidating; it is worth noting that far more people are employed in the Commercial banking sector than any other part of the financial services industry. Jobs in banking can be exciting and offer excellent opportunities to learn about business, interact with people and build up a clientele. In future, if we are well-prepared and enthusiastic about entering the field, we are likely to find a wide variety of opportunities open to us.

Thus, we can predict the future of Commercial bank, to be spreaded world wide. They will be providing an unprecedented level of service to a wide range of business clients, from small business, through to multi-national corporate clients. In future, Commercial Bank will come up with more innovative and experienced depth knowledge of specific sectors, to meet all of our banking requirements.

BIBLIOGRAPHY



Books

Commercial Banking Management – By “Reed Edward”

Banking, Theory and Practice – By “Reddy P N”

Banking – by Parker J

Websites

www.rbibulletin.com

www. icici.com

www. britannica.com


http://www.britannica.com/ebc/article-9361232

Commercial Banking Amey Dalvi No 19

Documents

Transcript of Commercial Banking Amey Dalvi No 19