Commercial Banking

Index
Definition
Evolution of commercial bank
Structure of Banking Industry in India
Function of Commercial Bank
Scope of Commercial Banking
Conclusion




Definition of a Bank
The term Bank has been dened in different ways by different economists.
A few denitions are:
According to Walter Leaf A bank is a person or corporation which holds itself out to receive from the
public, deposits payable on demand by cheque. Horace White has dened a bank, as a manufacture of
credit and a machine for facilitating exchange.According to Prof. Kinley, A bank is an establishment
which makes to individuals such advances of money as may be required and safely made, and to which
individuals entrust money when not required by them for use.
Origin of the word Bank
The name bank derives from the Italian word banco "desk/bench", used during the Renaissance era
by Florentine bankers, who used to make their transactions above a desk covered by a green tablecloth.
The Banking Companies Act of India denes Bank as
A Bank is a nancial institution which accepts money from the public for the purpose of lending or
investment repayable on demand or otherwise withdrawable by cheques, drafts or order or
otherwise.Thus, we can say that a bank is a nancial institution which deals in debts and credits. It
accepts deposits, lends money and also creates money. It bridges the gap between the savers and
borrowers. Banks are not merely traders in money but also in an important sense manufacturers of money
Investopedia Definition of 'Commercial Bank'
A financial institution that provides services, such as accepting deposits, giving business loans and auto
loans, mortgage lending, and basic investment products like savings accounts and certificates of deposit.
The traditional commercial bank is a brick and mortar institution with tellers, safe deposit boxes, vaults
and ATMs. However, some commercial banks do not have any physical branches and require consumers
to complete all transactions by phone or Internet. In exchange, they generally pay higher interest rates on
investments and deposits, and charge lower fee.
Com-mer-cial bank
Noun: A bank that offers services to the general public and to companies
Meaning
A commercial bank is a prot-seeking business rm, dealing in money and credit. It is a nancial
institution dealing in 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 thus, functions as a mobiliser of saving in the economy. A bank
is, therefore like a reservoir into which ow 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.
Evolution of Commercial Banking in India
The commercial banking industry in India started in 1786 with the establishment of the Bank of Bengal
in Calcutta. The Indian Government at the time established three Presidency banks, viz., the Bank of
Bengal (established in 1809), the Bank of Bombay (established in 1840) and the Bank of Madras
(established in 1843). In 1921, the three Presidency banks were amalgamated to form the Imperial Bank
of India, which took up the role of a commercial bank, a bankers' bank and a banker to the Government.
The Imperial Bank of India was established with mainly European shareholders. It was only with the
establishment of Reserve Bank of India (RBI) as the central bank of the country in 1935, that the quasi-
central banking role o fthe Imperial Bank of India came to an end.
In 1860, the concept of limited liability was introduced in Indian banking, resulting in the establishment
of joint-stock banks. In 1865, the Allahabad Bank was established with purely Indian shareholders.
Punjab National Bank came into being in 1895. Between 1906 and 1913, other banks like Bank of India,
Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up.
After independence, the Government of India started taking steps to encourage the spread of banking in
India. In order to serve the economy in general and the rural sector in particular, the All India Rural
Credit Survey Committee recommended the creation of a state-partnered and state-sponsored bank
taking over the Imperial Bank of India and integrating with it, the former state-owned and state-
associate banks. Accordingly, State Bank of India (SBI) was constituted in 1955. Subsequently in 1959,
the State Bank of India (subsidiary bank) Act was passed, enabling the SBI to take over eight former
state-associate banks as its subsidiaries.
To better align the banking system to the needs of planning and economic policy, it was considered
necessary to have social control over banks. In 1969, 14 of the major private sector banks were
nationalized. This was an important milestone in the history of Indian banking. This was followed by the
nationalisation of another six private banks in 1980. With the nationalization of these banks, the major
segment of the banking sector came under the control of the Government. The nationalisation of banks
imparted major impetus to branch expansion in un-banked rural and semi-urban areas, which in turn
resulted in huge deposit mobilization, thereby giving boost to the overall savings rate of the economy. It
also resulted in scaling up of lending to agriculture and its allied sectors. However, this arrangement also
saw some weaknesses like reduced bank profitability, weak capital bases, and banks getting burdened
with large non-performing assets.
To create a strong and competitive banking system, a number of reform measures were initiated in early
1990s. The thrust of the reforms was on increasing operational efficiency, strengthening supervision
over banks, creating competitive conditions and developing technological and institutional
infrastructure. These measures led to the improvement in the financial health, soundness and efficiency
of the banking system.






Types of Commercial Banking



Overview on the Banking structure in India
Scheduled Banks:
Scheduled banks in India are those that are listed in the Second Schedule of the Reserve Bank of India
Act, 1934. RBI includes only those banks in this schedule which satisfy the criteria as laid down vide
section 42 (6) (a) of the Act.

Unscheduled Banks:
Non-scheduled banks also function in the Indian banking space, in the form of Local Area Banks (LAB). As
at end-March 2009 there were only 4 LABs operating in India. Local area banks are banks that are set up
under the scheme announced by the government of India in 1996, for the establishment of new private
banks of a local nature; with jurisdiction over a maximum of three contiguous districts. LABs aid in the
mobilization of funds of rural and semi urban districts.
Scheduled Commercial Bank
A commercial bank (or business bank) is a type of retail bank that provides services, such as accepting
deposits, giving business loans and basic investment products.
Public Sector Banks
These are banks where majority stake is held by the Government of India.
Examples of public sector banks are: SBI, Bank of India, Canara Bank, etc.

Private Sector Banks
These are banks majority of share capital of the bank is held by private individuals. These banks are
registered as companies with limited liability.
Examples of private sector banks are: ICICI Bank, Axis bank, HDFC, etc.

Foreign Banks
These banks are registered and have their headquarters in a foreign country but operate their branches
in our country.
Examples of foreign banks in India are: HSBC, Citibank, Standard Chartered Bank, etc.

Regional Rural Banks
These Banks were established under the provisions of an Ordinance promulgated on the 26th
September 1975 and the RRB Act, 1976 with an objective to ensure sufficient institutional credit for
agriculture and other rural sectors.
Prathama bank is the first Regional Rural Bank in India located in the city Moradabad in Uttar Pradesh.

Other Scheduled Commercial Bank
Any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2
of 1934), but does not include a co-operative bank"

Scheduled Cooperative Bank

A co-operative bank is a financial entity which belongs to its members, who are at the same time the
owners and the customers of their bank. Co-operative banks are often created by persons belonging to
the same local or professional community or sharing a common interest.
Co-operative banks function on the basis of "no-profit no-loss".
Anyonya Co-operative Bank Limited (ACBL) is the first co-operative bank in India located in the city of
Vadodara in Gujarat.

Rural Cooperative Banks
There are located in rural region and classified as short term and long terms based on the duration of
credit needs for rural India, mainly for agriculture sector.

Urban Cooperative Banks
As the name suggest they are located in urban India and based on their geographical reach and credit
providing capacity they are classified as signal or multi state co-operatives

Statistics about Commercial Bank in India

TABLE NO. 1.1 PROGRESS OF COMMERCIAL BANKING AT A GLANCE
IMPORTANT
INDICATORS
June
1969
March
2003
March
2004
March
2005
March
2006
March
2007
March
2008
March
2009
March
2010
March
2011
1 2 3 4 5 6 7 8 9 10
No. of Commercial
Banks
89 294 291 288 222 183 175 170 169 169
(a) Scheduled
Commercial Banks
73 289 286 284 218 179 171 166 165 165
Of which : Regional
Rural Banks
- 196 196 196 133 96 91 86 82 82
(b) Non-Scheduled
Commercial Banks
16 5 5 4 4 4 4 4 4 4
Number of Offices of
Scheduled
Commercial Banks in
India ^
8262 66535 67188 68355 69471 71839 76050 80547 85393 90263
(a) Rural 1833 32303 32121 32082 30579 30551 31076 31667 32624 33683
(b) Semi-Urban 3342 14859 15091 15403 15556 16361 17675 18969 20740 22843
(c) Urban 1584 10693 11000 11500 12032 12970 14391 15733 17003 17490
(d) Metropolitan 1503 8680 8976 9370 11304 11957 12908 14178 15026 16247
Population per office
(in thousands)
64.0 16.0 16.0 16.0 16.0 15.0 15.0 14.5 13.8 13.4

Source: RBI website




Functions of Commercial Banking
Commercial banks have to perform a variety of functions which are common to both developed and
developing countries. These are known as General Banking functions of the commercial banks. The
modern banks perform a variety of functions. These can be broadly divided into two categories: (a)
Primary functions and (b) Secondary function