commercialbanksitsfunctionsbychiraunahar-210301172652.pptx

commercialbanksitsfunctionsbychiraunahar-210301172652.pptx

1. SUB :- Economics-II COMMERCIAL BANKS & ITS FUNCTIONS SHREE VAISHNAV INSTITUTE OF MANAGEMENT

2. Commercial Bank is an institution which performs the functions of accepting deposits, granting loans and making investments with the aim of earning profits. They are also called ‘DEPOSIT BANKS’ . The amount of money earned by a commercial bank is determined by the SPREAD which is the difference of the interest it pays on deposits and the interest it earns on loans. WHAT IS COMMERCIAL BANK ?

3. Household Bank Firm Deposit Loans Interest Interest Interest that a bank earn on loan is higher than the interest that it pays to depositors. Ex.:- Suppose a customer(say A) deposits Rs . 10,000 in a commercial bank at an annual interest rate of 2% & on the same day a customer (say B) take a loan of Rs . 10,000 from the same bank at an annual interest rate of 5%. At the end of a year, the bank pays Rs . 200 as interest to Customer A & receives Rs . 500 as interest from the Customer B. Hence, Rs . 300(500-200) is the SPREAD .

4. Some Commercial Banks in INDIA State Bank of India (SBI) ICICI Bank Limited Punjab National Bank (PNB) Bank Of India (BOI) Central Bank of India (CBI) Yes Bank HDFC Bank Oriental Bank of Commerce (OBC Bank) Union Bank of India Indian Bank IDBI Bank Allahabad Bank Axis Bank

5. Loaos of some Commercial Banks

6. FUNCTIONS OF COMMERCIAL BANKS

7. FUNCTIONS OF COMMERCIAL BANKS Primary Functions Secondary Functions Acceptance of deposits Advancing Loans Creation of credit Clearing of cheques Agency Services General utility services

8. Primary Functions

9. Acceptance of Deposits Commercial banks receive deposits from the people who have surplus money and willing to deposit with banks for the purpose of safety and interests etc. The main types of deposits are:- Current Deposits Savings Deposits Fixed Deposits

10. Current Account Usually open by businessmen No interest received Unlimited cheques Unlimited transactions Deposits Saving Account Minimum balance Restrictions on withdrawal Interest received Limited cheques Limited transactions Fixed Deposits Minimum balance No withdrawal Higher interest on longer tenor deposits No cheques Only 2 transactions

11. The deposits received by banks are not allowed to remain idle. So, after keeping certain cash reserves , the balance is given to needy borrowers and interest is charged from them, which is the main source of income for commercial banks. Bank advances loans to all types of persons, businessmen and investors, against personal security, gold, silver, stock of goods & other assets. Advancing Loans

12. The most common way of lending are: Overdraft Facilities : In this case, the depositor in a current account is allowed to draw over and above his account up to a previously agreed limit. The bank allows the customer to overdraw his account through cheques. The bank, however, charges interest only on the amount overdrawn from the account. 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. 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 .

13. The most common way of lending are: Money at Call : Bank also grant 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 short notice hence, they are described as money at call or call money . Consumer Credit : Banks also grant credit 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 instalments in a short time .

14. Credit creation is most significant function of commercial banks. While sanctioning a loan to a customer, they do not provide cash to the borrower. Instead, they open a deposit account from which the borrower can withdraw. In other words, while sanctioning a loan, they automatically create deposits, known as a credit creation from commercial banks. Creation of credit

15. Money lend by bank Deposit of bank Bank Firm A Firm B Firm C Rs. 90 Rs. 90 Rs. 81 Rs. 81 Rs. 72.9 Rs. 72.9 Rs . 100 Initial deposit Credit : Rs. 100 + 90 +81 + 72.9 + ……. > initial deposit of Rs 100

16. It is the process of moving a cheque from the bank in which it was deposited to the bank on which it was drawn, and the movement of the money in the opposite direction. This process is called the clearing cycle and normally results in a credit to the account of bank of deposit, and an equivalent debit to the account at the bank on which it was drawn. Clearing of cheques

17. Secondary Functions

18. Banks act as agents to their customers in different ways: It collect cheques , rent, interest etc & pay insurance premium, mutual funds, rent, water taxes, electricity bills etc of their customers. Collection of dividend on shares purchased by customers. Buy and sell shares, securities on behalf of their customers. Purchase & sale of foreign exchange . Agency services

19. Banks act as agents to their customers in different ways: Acts as Correspondent : Sometimes banks act as representative and correspondents of their customers. They get passports, traveller’s tickets etc for their customers . Acts as Trustee and Executor : Banks preserve the ‘Wills’ of their customers and execute them after their death . Income-tax Consultancy : Banks may also employ income tax experts to prepare income tax returns for their customers and to help them to get refund of income tax. Agency services

20. Commercial banks also provide certain services of general utility to the society: Locker facilities : The customers can keep their valuables, such as gold and silver ornaments, important documents. Banks issue traveller’s cheque or credit cards to their customers so that they may be spared from the risk of carrying cash during the journey. Business information & statistics. Banks underwrite the shares and debentures issued by the Government, public or private companies . General utility services

21. Commercial banks also provide certain services of general utility to the society: Acting Referee : Banks may act as referees with respect to the financial standing, business reputation and respectability of customers. Merchant Banking : Some commercial banks have opened merchant banking divisions to provide merchant banking services . Gift Cheques : Some banks issue cheques of various denominations to be used on auspicious occasions. General utility services

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