Commercial bank

An institution which accepts deposits, makes business loans, and offers related services. Commercial banks also allow for a variety of deposit accounts, such as checking, savings, and time deposit. These institutions are run to make a profit and owned by a group of individuals, yet some may be members of the Federal Reserve System. While commercial banks offer services to individuals, they are primarily concerned with receiving deposits and lending to businesses.

Nature of Commercial Banks

Commercial banks are an organization which normally performs certain financial transactions. It performs the twin task of accepting deposits from members of public and make advances to needy and worthy people form the society. When banks accept deposits its liabilities increase and it becomes a debtor, but when it makes advances its assets increases and it becomes a creditor. Banking transactions are socially and legally approved. It is responsible in maintaining the deposits of its account holders.

Indian Banking Industry

Banking in India originated in the first decade of 18th century with The General Bank of India coming into existence in 1786. This was followed by Bank of Hindustan. Both these banks are now defunct. The oldest bank in existence in India is the State Bank of India being established as "The Bank of Bengal" in Calcutta in June 1806. A couple of decades later, foreign banks like Credit Lyonnais started their Calcutta operations in the

1850s. At that point of time, Calcutta was the most active trading port, mainly due to the trade of the British Empire, and due to which banking activity took roots there and prospered. The first fully Indian owned bank was the Allahabad Bank, which was established in 1865. By the 1900s, the market expanded with the establishment of banks such as Punjab National Bank, in 1895 in Lahore and Bank of India, in 1906, in Mumbai - both of which were founded under private ownership. The Reserve Bank of India formally took on the responsibility of regulating the Indian banking sector from 1935. After India's independence in 1947, the Reserve Bank was nationalized and given broader powers. Nationalisation By the 1960s, the Indian banking industry has become an important tool to facilitate the development of the Indian economy. At the same time, it has emerged as a large employer, and a debate has ensued about the possibility to nationalize the banking industry. Indira Gandhi, the-then Prime Minister of India expressed the intention of the GOI in the annual conference of the All India Congress Meeting in a paper entitled "Stray thoughts on Bank Nationalisation." The paper was received with positive enthusiasm. Thereafter, her move was swift and sudden, and the GOI issued an ordinance and nationalised the 14 largest commercial banks with effect from the midnight of July 19, 1969. Jayaprakash Narayan, a national leader of India, described the step as a "masterstroke of political sagacity." Within two weeks of the issue of the ordinance, the Parliament passed the Banking Companies (Acquition and Transfer of Undertaking) Bill, and it received the presidential approval on 9th August, 1969. A second dose of nationalisation of 6 more commercial banks followed in 1980. The stated reason for the nationalisation was to give the government more control of credit delivery. With the second dose of nationalisation, the GOI controlled around 91% of the banking business of India.

After this, until the 1990s, the nationalised banks grew at a pace of around 4%, closer to the average growth rate of the Indian economy. Liberalisation In the early 1990s the then Narasimha Rao government embarked on a policy of liberalisation and gave licences to a small number of private banks, which came to be known as New Generation tech-savvy banks, which included banks such as UTI Bank(now re-named as Axis Bank) (the first of such new generation banks to be set up), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy of India, kickstarted the banking sector in India, which has seen rapid growth with strong contribution from all the three sectors of banks, namely, government banks, private banks and foreign banks. The next stage for the Indian banking has been setup with the proposed relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights which could exceed the present cap of 10%,at present it has gone up to 49% with some restrictions. The new policy shook the Banking sector in India completely. Bankers, till this time, were used to the 4-6-4 method (Borrow at 4%;Lend at 6%;Go home at 4) of functioning. The new wave ushered in a modern outlook and tech-savvy methods of working for traditional banks.All this led to the retail boom in India. People not just demanded more from their banks but also received more. Current Situation Currently (2007), banking in India is generally 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. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and

transparent balance sheets relative 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 but without any fixed 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. One may also expect M&As, takeovers, and asset sales. 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.

Activities of Commercial Banks

The modern Commercial Banks in India cater to the financial needs of different sectors. The main functions of the commercial banks comprise: transfer of funds

acceptance of deposits offering those deposits as loans for the establishment of industries Purchase of houses, equipments, capital investment purposes etc. The banks are allowed to act as trustees. On account of the knowledge of the financial market of India the financial companies are attracted towards them to act as trustees to take the responsibility of the security for the financial instrument like a debenture. The Indian Government presently hires the commercial banks for various purposes like tax collection and refunds, payment of pensions etc.

List of Commercial Banks in India

SBI & Associates:

State Bank of India State Bank of Bikaner & Jaipur State Bank of Hyderabad State Bank of Indore State Bank of Mysore State Bank of Patiala State Bank of Travancore

Nationalised Banks:

Allahabad Bank Andhra Bank Bank of Baroda Bank of India Bank of Maharashtra Canara Bank Central Bank of India Corporation Bank

Dena Bank IDBI Bank Ltd. Indian Bank Indian Overseas Bank Oriental Bank of Commerce Punjab & Sind Bank Punjab National Bank Syndicate Bank UCO Bank Union Bank of India United Bank of India Vijaya Bank

Foreign Banks:

ABN Amro Bank Abu Dhabi Commercial Bank American Express Banking Corporation Antwerp Diamond Bank AB Bank Bank International Indonesia Bank of America Bank of Bahrain & Kuwait Bank of Ceylon Bank of Nova Scotia Bank of Tokyo Mitsubishi UFJ Barclays Bank BNP Paribas Calyon Bank Chinatrust Commercial Bank Citibank

DBS Bank Deutsche Bank Hongkong & Shanghai Banking Corporation JP Morgan Chase Bank JSC VTB Bank Krung Thai Bank Mashreq Bank Mizuho Corporate Bank Oman International Bank Shinhan Bank Societe Generale Sonali Bank Standard Chartered Bank State Bank of Mauritius UBS AG

Other Scheduled Commercial Banks:

Axis Bank Bank of Rajasthan Catholic Syrian Bank City Union Bank Development Credit Bank Dhanalakshmi Bank Federal Bank HDFC Bank ICICI Bank IndusInd Bank ING Vysya Bank Jammu & Kashmir Bank Karnataka Bank Karur Vysya Bank Kotak Mahindra Bank

Lakshmi Vilas Bank Nainital Bank Ratnakar Bank SBI Commercial & International Bank South Indian Bank Tamilnad Mercantile Bank Yes Bank

Indias GDP has been growing at a rapid clip over the past decade and is set to grow at even a faster pace in the coming decade.Financial services penetration of the Indian economy is quite low compared to even other developing economies.With majority of the Indian population mired in poverty,access to banks and financial companies is quite hard as people lack knowledge and education.Indias banks have grown at a rapid pace over the past 2 decades after the financial liberalization.However this growth has still lacked in meeting the massive demand in the need of financial intermediation.This has led to the growth on non-banking financing companies (NBFCs) and microfinance companies.With the opening of the insurance sector,financial companies in India are set to enter a new growth phase.Major banks in India are either state owned or previous government owned institutions which have been fully privatized like ICICI and HDFC Bank.Both the state owned banks and the private banks have managed to grow without throwing the whole system in a crisis like what has happened in the recent past in Europe and USA and in China in the 1990s.Here is a list of the 10 Major Banks in India 1) State Bank of India (SBI) - SBI is Indias Largest Bank which is majority owned by the Government.The Company has a number of Subsidiaries and has been a market outperformer in recent times.Revenues of $22 Billion.The SBI has 7 subsidiaries of which 2 have been merged and 5 are remaining .
State Bank Bikaner Jaipur State Bank of Hyderabad State Bank of Mysore State Bank of Patiala State Bank of Travancore

2) ICICI Bank This is the largest Indian Private Bank with operations in all Financial Services Sectors.The Company has faced a bad time during the Lehman downturn but has recovered well.Revs of $12.5 Billion.ICICI Bank is also strong in almost all sectors of the financial industry and has one of the strongest management teams in the country.Like HDFC Bank majority of the shareholding is held by foreign investors.The company which overextended itself in the 2007-2008 boom has now reduced the size of its risky segments and is again back on the growth trajectory. 3) HDFC Bank HDFC Bank like Axis Bank has shown remarkable growth in the last few years.The Bank which was founded by Indias largest housing finance company HDFC has assets of around $22 billion.One of the best rated banks in terms of service quality and growth.

4) Punjab National Bank Punjab National Bank (PNB , is the second largest PSU bank with about 5000 branches across 764 cities.The Bank like BOB and SBI has shown good growth while at the same time managed to control bad debt. 5) Axis Bank - Axis Bank has been the best performing private bank alongwith HDFC Bank showing excellent growth in topline and bottomline.The Bank has been expanding into insurance and investment banking (acquired Enam).Axis Bank was formerly UTI Bank that begun operations in 1994.The Bank was promoted jointly by UTI,LIC and other state owned general insurers.One of the best Indian bank stock picks. 6) Bank of Baroda Bank of Baroda(BoB) is the third largest bank in India and is government owned like SBI and PNB. BOB as it is popularly known has shown excellent growth over the last few years and has managed to control its Non-Performing Asset (NPA).The Bank has good management and manages to earn nice interest spreads. 7) Bank of India -Bank of India (BoI)is Indias 4th largest bank, with 3374 branches, including 27 branches outside India. It was the first bank in India promoted by Indian interests to serve all the communities of India.The stock of the company has not performed as well as it peers post the Lehman crisis.It has seen its market cap decrease relative to its larger PSU Bank peers IDBI Bank - Industrial Development Bank of India Limited(IDBI) is a leading public sector banks . RBI categorised IDBI as an other public sector bank. The commercial banking arm, IDBI BANK, was merged into IDBI.This PSU Bank has supposed have great potential and could be the next ICICI in the making. 9) Kotak Mahindra Bank - This is the first NBFC to convert into a bank.The bank has its origins as an investment bank and is still very strong in the capital markets.The Bank and its sister concerns are present in most of the financial segments of the market like Private Equity,Wealth Management,Broking,Investment Banking etc. 10) Yes Bank Yes Bankwas founded by Ashok Kapur and Rana Kapoor.This bank though still small compared to its larger peers,has come into the top 10 due to its path breaking performance over the last few years in terms of growth.It has managed to set new standards and has broken out from the league of smaller private banks.

Total Income Wise Listing

Num ber Total Net No. of of Income(R Profit Employees Bran s Mn) (Rs Mn) ches 9143 198774 431836 44067

Bank Name

no of atms

State Bank of India 25000

ICICI Bank Limited 2209

557

25479

187676

25401

Punjab National Bank 700

4066 58047

108153

14393

Canara Bank 815

2532 46893

100890

13432

Bank of Baroda 634

2687 38737

82917

8270

Bank of India 500

2563 41808

82131

7014

Industrial Development Bank of India Limited 173 1140

4548

66612

5609

Union Bank of India

2095 25421

64888

6752

939

Central Bank of India 3656

3143 37241

59164

2574

HDFC Bank Limited 1323

515

14878

55993

8708

I. EVOLUTION OF BANKING IN INDIA

Modern banking in India could be traced back to the establishment of Bank of Bengal (Jan 2, 1809), the first jointstock bank sponsored by Government of Bengal and governed by the royal charter of the British India Government. It was followed by establishment of Bank of Bombay (Apr 15, 1840) and Bank of Madras (Jul 1, 1843). These three banks, known as the presidency banks, marked the beginning of the limited liability and joint stock banking in India and were also vested with the right of note issue. In 1921, the three presidency banks were merged to form the Imperial Bank of India, which had multiple roles and responsibilities and that functioned as a commercial bank, a banker to the government and a bankers bank. Following the establishment of the Reserve Bank of India (RBI) in 1935, the central banking responsibilities that the Imperial Bank of India was carrying out came to an end, leading it to become more of a commercial bank. At the time of independence of India, the

capital and reserves of the Imperial Bank stood at Rs 118 mn, deposits at Rs 2751 mn and advances at Rs 723 mn and a network of 172 branches and 200 sub offices spread all over the country. In 1951, in the backdrop of central planning and the need to extend bank credit to the rural areas, the Government constituted All India Rural Credit Survey Committee, which recommended the creation of a state sponsored institution that will extend banking services to the rural areas. Following this, by an act of parliament passed in May 1955, State Bank of India was established in Jul, 1955. In 1959, State Bank of India took over the eight former state-associated banks as its subsidiaries. To further accelerate the credit to fl ow to the rural areas and the vital sections of the economy such as agriculture, small scale industry etc., that are of national importance, Social Control over banks was announced in 1967 and a National Credit Council was set up in 1968 to assess the demand for credit by these sectors and determine resource allocations. The decade of 1960s also witnessed significant consolidation in the Indian banking industry with more than 500 banks functioning in the 1950s reduced to 89 by 1969. For the Indian banking industry, Jul 19, 1969, was a landmark day, on which nationalization of 14 major banks was announced that each had a minimum of Rs 500 mn and above of aggregate deposits. In 1980, eight more banks were nationalised. In 1976, the Regional Rural Banks Act came into being, that allowed the opening of specialized regional rural banks to exclusively cater to the credit requirements in the rural areas. These banks were set up jointly by the central government, commercial banks and the respective local governments of the states in which these are located. The period following nationalisation was characterized by rapid rise in banks business and helped in increasing national savings. Savings rate in the country leapfrogged from 10-12% in the two decades of 1950-70 to about 25 % post nationalisation period. Aggregate deposits which registered annual growth in the range of 10% to 12% in the 1960s rose to over 20% in the 1980s.

Growth of bank credit increased from an average annual growth of 13% in the 1960s to about 19% in the 1970s and 1980s. Branch network expanded significantly leading to increase in the banking coverage. Indian banking, which experienced rapid growth following the nationalization, began to face pressures on asset quality by the 1980s. Simultaneously, the banking world everywhere was gearing up towards new prudential norms and operational standards pertaining to capital adequacy, accounting and risk management, transparency and disclosure etc. In the early 1990s, India embarked on an ambitious economic reform programme in which the banking sector reforms formed a major part. The Committee on Financial System (1991) more popularly known as the Narasimham Committee prepared the blue print of the reforms. A few of the major aspects of reform included (a) moving towards international norms in income recognition and provisioning and other related aspects of accounting (b) liberalization of entry and exit norms leading to the establishment of several New Private Sector Banks and entry of a number of new Foreign Banks (c) freeing of deposit and lending rates (except the saving deposit rate), (d) allowing Public Sector Banks access to public equity markets for raising capital and diluting the government stake,(e) greater transparency and disclosure standards in financial reporting (f) suitable adoption of Basel Accord on capital adequacy (g) introduction of technology in banking operations etc. The reforms led to major changes in the approach of the banks towards aspects such as competition, profitability and productivity and the need and scope for harmonization of global operational standards and adoption of best practices. Greater focus was given to deriving efficiencies by improvement in performance and rationalization of resources and greater reliance on technology including promoting in a big way computerization of banking operations and introduction of electronic banking. The reforms led to significant changes in the strength and sustainability of Indian banking. In addition to significant growth

in business, Indian banks experienced sharp growth in profitability, greater emphasis on prudential norms with higher provisioning levels, reduction in the non performing assets and surge in capital adequacy. All bank groups witnessed sharp growth in performance and profitability. Indian banking industry is preparing for smooth transition towards more intense competition arising from further liberalization of banking sector that was envisaged in the year 2009 as a part of the adherence to liberalization of the financial services industry.

II. STRUCTURE OF THE BANKING INDUSTRY

According to the RBI definition, commercial banks which conduct the business of banking in India and which (a) have paid up capital and reserves of an aggregate real and exchangeable value of not less than Rs 0.5 mn and (b) satisfy the RBI that their affairs are not being conducted in a manner detrimental to the interest of their depositors, are eligible for inclusion in the Second Schedule to the Reserve Bank of India Act, 1934, and when included are known as Scheduled Commercial Banks. Scheduled Commercial Banks in India are categorized in five different groups according to their ownership and/or nature of operation. These bank groups are (i) State Bank of India and its associates, (ii) Nationalised Banks, (iii) Regional Rural Banks, (iv) Foreign Banks and (v) Other Indian Scheduled Commercial Banks (in the private sector). All Scheduled Banks comprise Schedule Commercial and Scheduled Co-operative Banks. Scheduled Cooperative banks consist of Scheduled State Cooperative Banks and Scheduled Urban Cooperative Banks.

Banking Industry at a Glance

In the reference period of this publication (FY06), the number of scheduled commercial banks functioning in India was 222, of which 133 were regional rural banks. There are 71,177 bank XIV

offices spread across the country, of which 43 % are located in rural areas, 22% in semi-urban areas, 18% in urban areas and the rest (17 %) in the metropolitan areas. The major bank groups (as defined by RBI) functioning during the reference period of the report are State Bank of India and its seven associate banks, 19 nationalised banks and the IDBI Ltd, 19 Old Private Sector Banks, 8 New Private Sector Banks and 29 Foreign Banks.

Table 1: Indian Banking at a Glance

Source: Reserve Bank of India

Table 2: Number of Banks, Group Wise

Source: Indian Banks Association/ Reserve Bank of India. * Includes Industrial Development Bank of India Ltd.

Table 3: Group Wise: Comparative Average

Source: Reserve Bank of India.

Table 4: Bank Groups: Key Indicators

Source: Reserve Bank of India.

Mergers & Acquisitions

During FY06, two domestic banks were amalgamated - Ganesh Bank of Kurundwad with Federal Bank Ltd and Bank of Punjab Ltd with Centurion Bank Ltd to become Centurion Bank of Punjab Ltd, while one Foreign bank UFJ Bank Ltd merged with Bank of Tokyo-Mitsubishi Ltd. ING Bank NV closed its business in India. In Sept, 2006, The United Western Bank Ltd was placed under moratorium leading to its amalgamation with Industrial Development Bank of India Ltd. in Oct, 2006. On Apr 1, 2007, Bharat Overseas Bank an old private sector bank was taken over by Indian Overseas Bank and on Apr 19, 2007, Sangli Bank, another old private sector bank was merged with ICICI Bank, a new private sector bank.

Shareholding Pattern
As of Mar 2006, only four Nationalised Bank had 100% ownership of the Government. These are Central Bank of India, Indian Bank, Punjab and Sind Bank and United Bank of India. As of Mar 2006, the government shareholding in the State Bank of

India stood at 59.7% and in between 51-77% in other nationalised banks. In Feb 2007, Indian Bank came out with a public issue thus leaving only three nationalised banks having 100% government ownership. Foreign institutional holding up to 20% of the paid up is allowed in respect of Public Sector Banks including State Bank of India and many of the banks have reached the threshold level for FII investment. In respect of Private Sector Banks where higher FII holding is allowed, threshold limit has been reached in the leading banks.

III. INDIAN BANKING AND INTERNATIONAL TRENDS

When compared to other emerging markets, the growth of Indian banking has been impressive and compares favorably on several counts. A recent study by Bank for International Settlements on the progress and the prospects of banking systems in emerging countries highlights the following features of the performance of Indian banks: Average growth rate of real aggregate credit in India rose from 6.1% during the period 1995- 99 to 14.6 % in 200004. The average growth rate of real aggregate credit in India during 2000-04 in India is higher as compared to major countries and regions in the emerging markets, such as China (13.3%), Other Asia (4.7%), Latin America (4.5%), and Central Europe (9.6%). Commercial banks in India account for a major share of the bank credit (97%) as compared to Latin America (68%), Other Asia (74%) and Central Europe (83%).

Real bank credit to the private sector has shown sustained growth in India, and has moved from 3.9% a year in 199094 to 6.9% a year in 1995-99 to 13.5 % a year in 2000-04. In 2005, real bank credit to the private sector in India showed a growth of 30% year-on-year as against 9.4% in China and 15.8% in emerging markets.

 In India, during the period 1999 and 2004, non-performing loans as a percentage of total commercial bank assets came down from 6.1% to 3.3%, capital asset ratios moved up from 11.3% to 12.9% and operating costs as a percentage of total assets reduced from 2.4% to 2.3%. NPAs in China in 2004 stood at 6%. In India, return on assets of banks during the period 19992004 moved up from 0.4% to 1.1%, and return on equity from 8.5% to 20.9% where as in China the former rose from 0.1% to 0.3%.

IV. BUSINESS OF COMMERCIAL BANKS

1.

Balance Sheet Growth

In FY06, the aggregate balance sheet of the scheduled commercial banks increased by 18.4%, over a 19.3 % growth registered in FY05. The ratio of bank assets to GDP rose to 86.9% as compared to 82.8% in FY05. Banking industry gained from the by rapid rise in the real economy, leading to surge in several areas of business.

2.

Capital and Reserves

The capital of the scheduled commercial banks as on Mar 31, 2006 stood at Rs 252040 mn. During FY06, reserves and surplus of all scheduled commercial banks rose by 27.6%. Revenue and other reserves nearly doubled for the banks as a whole, with SBI reporting four fold increase in this regard.
3.

Deposits and Advances

Deposits of SCBs grew by 17.8 % in FY06 as against 16.6% in FY05, but the advances growth outstripped this pace with a rise of 31.8% in FY06, over a 33.2% growth in FY05. As per a recent RBI report, FY06 was the second consecutive year, when increase in credit in absolute terms was more than the absolute increase in aggregate deposits.

Table 5: Deposits/Advances/Investments of

Bank Groups in India (In Rs mn)

Source: Reserve Bank of India

4.

Group-wise Performance
The growth in deposits across the different bank groups showed substantial variation. Public Sector Banks with a deposit growth of 12.9% and Old Private Sector Banks with 11.4% showed a relatively subdued growth in deposits where as the New Private Sector Banks with 50.7% and Foreign Banks with 31.7% showed a sharp rise. Borrowings of the Public Sector Banks grew at 24%, but that of the Foreign Banks was much higher (30%). Due to redemption of the India Millennium Deposits in Dec 2005, banks nonresident foreign currency deposits showed a sizeable decline. Loans and advances growth too was on similar trends. For Public Sector Banks, loan growth was 29.5% as compared to 34.9% in FY05, for Old Private Sector Banks, it was 21.5% as against 22.7% in the previous year, for New Private Sector Banks it was 50.2 % as against 33% in FY05, and for Foreign Banks it was 29.5% as against 24 % in FY05. In the non-food credit, apart from retail credit which grew at 40.9%; infrastructure (24%), basic metals (14.1%) and textiles (11.2%) were the other major sectors that received higher levels of incremental credit.

5.

Growth in Retail Lending

While total credit of the SCBs grew at 31% in FY06, credit to the new segments in the retail banking showed still higher growth rates. In FY06, loans to housing rose by 33.4%, credit card receivables by 47.9%, auto loans by 75%, and other personal loans by 39.1% taking the growth of retail loans during the FY06 to 40.9%. Retail loans in FY06 constituted 25.5% of the total loans and advances of scheduled commercial banks. Lending to sensitive sectors also rose significantly. Loans to capital market rose by 39.2%, to real estate markets by 81.78% and to commodities by 85.56% with the growth in these three segments reaching to 77.65% in FY06.

Table 6: Advances to Sensitive Sectors as a percentage to Total Loans

Source: Reserve Bank of India

6.

Priority Sector Advances

Credit to priority sector increased at a robust rate of 33.7% in FY06 on the top of 40.3% in the previous year. A major portion of the credit growth in the priority sector is accounted by agriculture and housing. Credit to SSI also grew sizeably.

Table 7: Priority Sector Lending

Source: Reserve Bank of India. Figures in brackets are annual growth rate in %

7.

Market Share
The share of Public Sector Banks showed deceleration in respect of major areas of business, where as that of the new private sector and Foreign Banks earned higher share of business. The market share of the Old Private Sector Banks too came under pressure. Public Sector Banks hold 75% market share in major areas of business.
Table 8: Major Components of Business, Bank GroupWise (in %)

Source: Reserve Bank of India * Industrial Development Bank of India Ltd ** Includes Industrial Development Bank of India Ltd

8.

Access to Equity Markets

Banks have been increasingly accessing primary equity capital markets for raising resources. In FY06, resource mobilization of banks through public equity markets rose by 24%. Resources raised by banks from public equity markets showed continuous increase, from Rs 24560 mn in FY04 to Rs 89220 mn in FY05 to Rs 110670 mn in FY06. Encouraged by the response to banks stocks, eleven banks, six in the public sector and five in the private sector, raised Rs 110670 mn from the equity markets. The Public Sector Banks which raised equity from the capital markets included Allahabad Bank, Oriental Bank of Commerce, Syndicate Bank, Andhra Bank, Bank of Baroda and Union Bank of India. The five Private Sector Banks were Lakshmi Vilas Bank Ltd, Yes Bank Ltd, ICICI Bank Ltd., The South Indian Bank Ltd and The United Western Bank Ltd. The size of the share issue of these banks was Rs 6270 mn where as the premium was at Rs 104400 mn. Banks also tapped private placement market for resource mobilization in a big way by raising Rs 301510 mn of which Public Sector Banks accounted for 74%. Bank stocks also emerged as an important portfolio for investment giving significant returns. Returns from bank stocks as measured through BSE Bankex rose from 28.6% in FY05 to 36.8 % in FY06 as compared to the benchmark index. Bank stocks still have scope for further growth with lower valuation prevailing at present in many banks.

Source : Bombay Stock Exchange.

9.

Asset Quality
There is a perceptible increase in the quality of bank assets. Standard assets as percent of all assets for scheduled commercial banks moved from 94.9% in FY05 to 96.7% in FY 06, with decline in reported sub standard, doubtful and loss assets. The proportion of standard assets rose across all the bank groups in FY06, showing improved management of assets by banks. According to a report of the Reserve Bank of India, the gross non performing assets of the scheduled commercial banks declined by Rs 73090 mn over and above the decline of Rs 65610 mn in FY05. As on 31 Mar 2006, gross NPAs of scheduled commercial banks stood at Rs 518150 mn of which 26.4% are with State Bank group, 53% with the nationalised banks, 7.1% with the Old Private Sector Banks, 7.3% with the New Private Sector Banks and 3.7% with the Foreign Banks. Scheduled commercial banks stepped up recovery efforts through numerous methods. In addition to their own internal recovery processes, banks recovered to the tune of Rs 6080 mn through one-time settlement and compromise schemes, Rs 2230 mn though Lok Adalats, Rs 47100 mn through Debt Recovery Tribunals and Rs 34230 mn through SARFAESI Act. Asset Reconstruction Company of India Ltd (ARCIL) acquired 559 cases amounting to Rs 211260 mn from banks.

Table 9: Asset Classification in Banks (as % of Total Assets)

Source: Reserve Bank of India

10. Distribution

of Network

The expansion in the distribution network of the banks is increasingly evident from the growth of the automated teller machines. There is a surge in the growth of off-site ATMs with their share in the total ATMs rising to 32% in respect of Public Sector Banks, 67% in State Bank group, 32% in Old Private Sector Banks, 63% in New Private Sector Banks and 73% in Foreign Banks. Computerisation of public sector bank branches is also moving at rapid pace. In 2007 the pace of computerization progressed much further. Public Sector Banks have 93 branches operating abroad in 26 countries. All scheduled commercial banks together have 106 branches abroad.

Table 10: Branches/ATMs/Staff in Banks (Number)

Source: Reserve Bank of India

11. Major

Indian banking, in addition to improvements in performance and efficiency, has also experienced significant changes in the structure of asset and liabilities. The major changes on the liabilities side include relatively higher growth of demand deposits over time deposits, and also, within time deposits, greater preference for short term over the longer term deposits. The share of demand deposits in total deposits increased from 14.7% in FY01 to 17% in FY06. The share of short term deposits in total time deposits increased from 43.8% in FY00 to 58.2% in FY06. The narrowing of interest rate spread between short and long term deposits has reduced the preference for long term deposits. Banks are moving away from investments to loans due to more lending opportunities offered by the higher economic growth. The rate of bank credit growth which was at 14.4% in FY03 rose sharply to reach 30% each in the FY05 and

Trends in Business

FY06. Bank credit has picked up momentum on the back of rising growth of real economy. A period of low interest rates induced banks to shift their preference from investments to advances, which led to the share of gross advances in total assets of all commercial banks reaching 54.7% in FY06 from 45% in two years prior to that. The sectors towards which the bank credit was directed has also shown significant changes. Retail loans witnessed growth of over 40% in the last two years, and began driving the credit growth to a significant extent. Retail loans as a percentage of Gross Advances rose from about 22% in FY04 to 25.5% in FY06. Within the retail loans, housing segment showed the highest growth of 50% in FY05 and 34% in FY06. As per the RBI data, banks direct exposure to commercial real estate more than doubled in FY06. Despite sharp rise in the credit growth, improved risk management processes and procedures of banks contained the surge in bad debts which is evident from the lower levels of incremental nonperforming assets reported by the banks as also the rise in the proportion of standard assets. Further improvement in risk management systems could provide banks with more opportunities in expanding credit and pursuing higher levels of growth in retail lending.

Reserve bank of India

The Reserve Bank of India (RBI, Hindi: ) is the central banking institution of India and controls the monetary policy of the rupee as well as US$300.21 billion (2010)[1] of currency reserves. The institution was established on 1 April 1935 during the British Raj in accordance with the provisions of the Reserve Bank of India Act, 1934. The share capital was divided into shares of Rs. 100 each fully paid which was entirely owned by private shareholders in the beginning. [2] Reserve Bank of India plays an important part in the development strategy of the government. It is a member bank of the Asian Clearing Union.

Reserve Bank of India was nationalised in the year 1949. The general superintendence and direction of the Bank is entrusted to Central Board of Directors of 20 members, the Governor and four Deputy Governors, one Government official from the Ministry of Finance, ten nominated Directors by the Government to give representation to important elements in the economic life of the country, and four nominated Directors by the Central Government to represent the four local Boards with the headquarters at Mumbai, Kolkata, Chennai and New Delhi. Local Boards consist of five members each Central Government appointed for a term of four years to represent territorial and economic interests and the interests of co-operative and indigenous banks

History
19351950

The central bank was founded in 1935 to respond to economic troubles after the first world war.[3] The Reserve Bank of India was set up on the recommendations of the Hilton-Young Commission. The commission submitted its report in the year 1926, though the bank was not set up for another nine years. The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as to regulate the issue of bank notes, to keep reserves with a view to securing monetary stability in India and generally to operate the currency and credit system in the best interests of the country. The Central Office of the Reserve Bank was initially established in Kolkata, Bengal, but was permanently moved to Mumbai in 1937. The Reserve Bank continued to act as the central bank for Myanmar till Japanese occupation of Burma and later up to April 1947, though Burma seceded from the Indian Union in 1937. After partition, the Reserve Bank served as the central bank for Pakistan until June 1948 when the State Bank of Pakistan commenced operations. Though originally set up as a shareholders bank, the RBI has been fully owned by the government of India since its nationalization in 1949.[4]
[ 19501960

Between 1950 and 1960, the Indian government developed a centrally planned economic policy and focused on the agricultural sector. The administration nationalized commercial banks[5] and established, based on the Banking Companies Act, 1949 (later called Banking Regulation Act) a central bank regulation as part of the RBI. Furthermore, the central bank was ordered to support the economic plan with loans.[6]

[edit] 19601969

As a result of bank crashes, the reserve bank was requested to establish and monitor a deposit insurance system. It should restore the trust in the national bank system and was initialized on 7 December 1961. The Indian government founded funds to promote the economy and used the slogan Developing Banking. The Government of India restructured the national bank market and nationalized a lot of institutes. As a result, the RBI had to play the central part of control and support of this public banking sector. [edit] 19691985 Between 1969 and 1980, the Indian government nationalized 6 more commercial banks, following 14 major commercial banks being nationalized in 1969(As mentioned in RBI website). The regulation of the economy and especially the financial sector was reinforced by the Government of India in the 1970s and 1980s. [7] The central bank became the central player and increased its policies for a lot of tasks like interests, reserve ratio and visible deposits.[8] The measures aimed at better economic development and had a huge effect on the company policy of the institutes. The banks lent money in selected sectors, like agri-business and small trade companies.[9] The branch was forced to establish two new offices in the country for every newly established office in a town.[10] The oil crises in 1973 resulted in increasing inflation, and the RBI restricted monetary policy to reduce the effects.[11] 12 [edit] 19851991 A lot of committees analysed the Indian economy between 1985 and 1991. Their results had an effect on the RBI. The Board for Industrial and Financial Reconstruction, the Indira Gandhi Institute of Development Research and the Security & Exchange Board of India investigated the national economy as a whole, and the security and exchange board proposed better methods for more effective markets and the protection of investor interests. The Indian financial market was a leading example for so-called "financial repression" (Mackinnon and Shaw).[12] The Discount and Finance House of India began its operations on the monetary market in April 1988; the National Housing Bank, founded in July 1988, was forced to invest in the property market and a new financial law improved the versatility of direct deposit by more security measures and liberalisation.[13] [edit] 19912000 The national economy came down in July 1991 and the Indian rupee was devalued. [14] The currency lost 18% relative to the US dollar, and the Narsimahmam Committee advised restructuring the financial sector by a temporal reduced reserve

ratio as well as the statutory liquidity ratio. New guidelines were published in 1993 to establish a private banking sector. This turning point should reinforce the market and was often called neo-liberal.[15] The central bank deregulated bank interests and some sectors of the financial market like the trust and property markets.[16] This first phase was a success and the central government forced a diversity liberalisation to diversify owner structures in 1998.[17] The National Stock Exchange of India took the trade on in June 1994 and the RBI allowed nationalized banks in July to interact with the capital market to reinforce their capital base. The central bank founded a subsidiary companythe Bharatiya Reserve Bank Note Mudran Limitedin February 1995 to produce banknotes.[18] [edit] Since 2000 The Foreign Exchange Management Act from 1999 came into force in June 2000. It should improve the foreign exchange market, international investments in India and transactions. The RBI promoted the development of the financial market in the last years, allowed online banking in 2001 and established a new payment system in 2004 - 2005 (National Electronic Fund Transfer).[19] The Security Printing & Minting Corporation of India Ltd., a merger of nine institutions, was founded in 2006 and produces banknotes and coins.[20] The national economy's growth rate came down to 5.8% in the last quarter of 2008 - 2009[21] and the central bank promotes the economic development.[22]

[edit] Structure
[edit] Central Board of Directors

The Central Board of Directors is the main committee of the central bank. The Government of India appoints the directors for a four-year term. The Board consists of a governor, four deputy governors, four directors to represent the regional boards, and ten other directors from various fields. [edit] Governors The central bank till now was governed by 21 governors. The 22nd, Current Governor of Reserve Bank of India is Dr Subbarao [edit] Supportive bodies The Reserve Bank of India has four regional representations: North in New Delhi, South in Chennai, East in Kolkata and West in Mumbai. The representations are formed by five members, appointed for four years by the central government and serve - beside the advice of the Central Board of Directors - as a forum for regional banks and to deal with delegated tasks from the central board.[23] The institution has 22 regional offices.

The Board of Financial Supervision (BFS), formed in November 1994, serves as a CCBD committee to control the financial institutions. It has four members, appointed for two years, and takes measures to strength the role of statutory auditors in the financial sector, external monitoring and internal controlling systems. The Tarapore committee was set up by the Reserve Bank of India under the chairmanship of former RBI deputy governor S S Tarapore to "lay the road map" to capital account convertibility. The five-member committee recommended a three-year time frame for complete convertibility by 1999-2000. On 1 July 2006, in an attempt to enhance the quality of customer service and strengthen the grievance redressal mechanism, the Reserve Bank of India constituted a new department Customer Service Department (CSD). [edit] Offices and branches The Reserve Bank of India has 4 regional offices,15 branches and 5 sub-offices.[24] It has 22 branch offices at most state capitals and at a few major cities in India. Few of them are located in Ahmedabad, Bangalore, Bhopal, Bhubaneswar, Chandigarh, Chennai, Delhi, Guwahati, Hyderabad, Jaipur, Jammu, Kanpur, Kolkata, Lucknow, Mumbai, Nagpur, Patna, and Thiruvananthapuram. Besides it has sub-offices at Agartala, Dehradun, Gangtok, Kochi, Panaji, Raipur, Ranchi, Shimla and Srinagar. The bank has also two training colleges for its officers, viz. Reserve Bank Staff College at Chennai and College of Agricultural Banking at Pune. There are also four Zonal Training Centres at Belapur, Chennai, Kolkata and New Delhi.

[edit] Main functions

Reserve Bank of India regional office, Delhi entrance with the Yakshini sculpture depicting "Prosperity through agriculture".[25]

The regional offices of GPO (in white) and RBI (in sandstone) at Dalhousie Square, Kolkata. [edit] Bank of Issue Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right to issue bank notes of all denominations. The distribution of one rupee notes and coins and small coins all over the country is undertaken by the Reserve Bank as

agent of the Government. The Reserve Bank has a separate Issue Department which is entrusted with the issue of currency notes. The assets and liabilities of the Issue Department are kept separate from those of the Banking Department. Originally, the assets of the Issue Department were to consist of not less than twofifths of gold coin, gold bullion or sterling securities provided the amount of gold was not less than Rs. 40 crores in value. The remaining three-fifths of the assets might be held in rupee coins, Government of India rupee securities, eligible bills of exchange and promissory notes payable in India. Due to the exigencies of the Second World War and the post-was period, these provisions were considerably modified. Since 1957, the Reserve Bank of India is required to maintain gold and foreign exchange reserves of Rs. 200 crores, of which at least Rs. 115 crores should be in gold. The system as it exists today is known as the minimum reserve system. [edit] Monetary authority The Reserve Bank of India is the main monetary authority of the country and beside that the central bank acts as the bank of the national and state governments. It formulates, implements and monitors the monetary policy as well as it has to ensure an adequate flow of credit to productive sectors. Objectives are maintaining price stability and ensuring adequate flow of credit to productive sectors. The national economy depends on the public sector and the central bank promotes an expansive monetary policy to push the private sector since the financial market reforms of the 1990s.[26] The institution is also the regulator and supervisor of the financial system and prescribes broad parameters of banking operations within which the country's banking and financial system functions. Objectives are to maintain public confidence in the system, protect depositors' interest and provide cost-effective banking services to the public. The Banking Ombudsman Scheme has been formulated by the Reserve Bank of India (RBI) for effective addressing of complaints by bank customers. The RBI controls the monetary supply, monitors economic indicators like the gross domestic product and has to decide the design of the rupee banknotes as well as coins.[27] [edit] Manager of exchange control The central bank manages to reach the goals of the Foreign Exchange Management Act, 1999. Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.

[edit] [edit] Issuer of currency The bank issues and exchanges or destroys currency and coins not fit for circulation. The objectives are giving the public adequate supply of currency of good quality and to provide loans to commercial banks to maintain or improve the GDP. The basic objectives of RBI are to issue bank notes, to maintain the currency and credit system of the country to utilize it in its best advantage, and to maintain the reserves. RBI maintains the economic structure of the country so that it can achieve the objective of price stability as well as economic development, because both objectives are diverse in themselves. [edit] Minimum Reserve System - Principle of Currency Note Issue RBI can issue currency notes as much as the country requires, provided it has to make a security deposit of Rs. 200 crores, out of which Rs. 115 crores must be in gold and Rs. 85 crores must be FOREX Reserves. This principle of currency notes issue is known as the 'Minimum Reserve System'. [edit] Developmental role The central bank has to perform a wide range of promotional functions to support national objectives and industries.[6] The RBI faces a lot of inter-sectoral and local inflation-related problems. Some of this problems are results of the dominant part of the public sector.[28] [edit] Related functions The RBI is also a banker to the government and performs merchant banking function for the central and the state governments. It also acts as their banker. The National Housing Bank (NHB) was established in 1988 to promote private real estate acquisition.[29] The institution maintains banking accounts of all scheduled banks, too. There is now an international consensus about the need to focus the tasks of a central bank upon central banking. RBI is far out of touch with such a principle, owing to the sprawling mandate described above.

Policy rates, Reserve ratios, lending, and deposit rates as of 14 September, 2011 Bank Rate Repo Rate Reverse Repo Rate Cash Reserve Ratio (CRR) Statutory Liquidity Ratio (SLR) Base Rate Reserve Bank Rate Deposit Rate 6.0% 8.25% 7.25% 6.0% 24.0% 9.50%10.75% 4% 8.50%9.50%

[edit] Policy rates and Reserve ratios

Bank Rate: RBI lends to the commercial banks through its discount window to help the banks meet depositors demands and reserve requirements. The interest rate the RBI charges the banks for this purpose is called bank rate. If the RBI wants to increase the liquidity and money supply in the market, it will decrease the bank rate and if it wants to reduce the liquidity and money supply in the system, it will increase the bank rate. As of 5 May, 2011 the bank rate was 6%. Cash Reserve Ratio (CRR): Every commercial bank has to keep certain minimum cash reserves with RBI. RBI can vary this rate between 3% and 15%. RBI uses this tool to increase or decrease the reserve requirement depending on whether it wants to affect a decrease or an increase in the money supply. An increase in Cash Reserve Ratio (CRR) will make it mandatory on the part of the banks to hold a large proportion of their deposits in the form of deposits with the RBI. This will reduce the size of their deposits and they will lend less. This will in turn decrease the money supply. The current rate is 6%. Statutory Liquidity Ratio (SLR): Apart from the CRR, banks are required to maintain liquid assets in the form of gold, cash and approved securities. Higher liquidity ratio forces commercial banks to maintain a larger proportion of their resources in liquid form and thus reduces their capacity to grant loans and advances, thus it is an anti-inflationary impact. A higher liquidity ratio diverts the bank funds from loans and advances to investment in government and approved securities.

In well-developed economies, central banks use open market operations--buying and selling of eligible securities by central bank in the money market--to influence the volume of cash reserves with commercial banks and thus influence the volume of loans and advances they can make to the commercial and industrial sectors. In the open money market, government securities are traded at market related rates of interest. The RBI is resorting more to open market operations in the more recent years. Generally RBI uses three kinds of selective credit controls: 1. Minimum margins for lending against specific securities. 2. Ceiling on the amounts of credit for certain purposes. 3. Discriminatory rate of interest charged on certain types of advances. Direct credit controls in India are of three types: 1. Part of the interest rate structure i.e. on small savings and provident funds, are administratively set. 2. Banks are mandatorily required to keep 24% of their deposits in the form of government securities. 3. Banks are required to lend to the priority sectors to the extent of 40% of their advances.

RBI issues draft norms for new bank licenses

The Reserve Bank of India released draft guidelines for licensing of new banks in the private sector . The Reserve Bank has sought views/comments on the draft guidelines from banks, non-banking financial institutions, industrial houses, other institutions and the public at large. The suggestions and comments on the draft guidelines have to be sent by October 31, 2011. Final guidelines will be issued and the process of inviting applications for setting up of new banks in the private sector will be initiated after receiving

feedback, comments and suggestions on the draft guidelines, and after certain vital amendments to Banking Regulation Act, 1949 are in place. It may be recalled that pursuant to the announcement made by the Union Finance Minister in his budget speech and the Reserve Bank's Annual Policy Statement for the year 2010-11, a discussion paper on "Entry of New Banks in the Private Sector" was placed on RBI website on August 11, 2010. Key features of the draft guidelines are: (i) Eligible promoters: Entities / groups in the private sector, owned and controlled by residents, with diversified ownership, sound credentials and integrity and having successful track record of at least 10 years will be eligible to promote banks. Entities / groups having significant (10 per cent or more) income or assets or both from real estate construction and / or broking activities individually or taken together in the last three years will not be eligible. (ii) Corporate structure: New banks will be set up only through a wholly owned Non-Operative Holding Company (NOHC) to be registered with the Reserve Bank as a non-banking finance company (NBFC) which will hold the bank as well as all the other financial companies in the promoter group. (iii) Minimum capital requirement: Minimum capital requirement will be Rs 500 crore. Subject to this, actual capital to be brought in will depend on the business plan of the promoters. NOHC shall hold minimum 40 per cent of the paid-up capital of the bank for a period of five years from the date of licensing of the bank. Shareholding by NOHC in excess of 40 per cent shall be brought down to 20 per cent within 10 years and to 15 per cent within 12 years from the date of licensing of the bank.

(iv) Foreign shareholding: The aggregate non-resident shareholding in the new bank shall not exceed 49 per cent for the first 5 years after which it will be as per the extant policy. (v) Corporate governance: At least 50 per cent of the directors of the NOHC should be independent directors. The corporate structure should be such that it does not impede effective supervision of the bank and the NOHC on a consolidated basis by the Reserve Bank. Other conditions: The exposure of bank to any entity in the promoter group shall not exceed 10 per cent and the aggregate exposure to all the entities in the group shall not exceed 20 per cent of the paid-up capital and reserves of the bank The bank shall get its shares listed on the stock exchanges within two years of licensing. The bank shall open at least 25 per cent of its branches in unbanked rural centres (population upto 9,999 as per 2001 census) Existing NBFCs, if considered eligible, may be permitted to either promote a new bank or convert themselves into banks. In respect of promoter groups having 40 per cent or more assets / income from non-financial business, certain additional requirements have been stipulated.

Functions of Commercial Banks

Commercial bank being the financial institution performs diverse types of functions. It satisfies the financial needs of the sectors such as agriculture, industry, trade, communication, etc. That means they play very significant role in a process of economic social needs. The functions performed by banks are changing according to change in time and recently they are

becoming customer centric and widening their functions. Generally the functions of commercial banks are divided into two categories viz. primary functions and the secondary functions. The following chart simplifies the functions of banks.

Primary Functions of Commercial Banks

Commercial Banks performs various primary functions some of them are given below
1.

Accepting Deposits : Commercial bank accepts various types of deposits from public especially from its clients. It includes saving account deposits, recurring account deposits, fixed deposits, etc. These deposits are payable after a certain time period. Making Advances : The commercial banks provide loans and advances of various forms. It includes an over draft facility, cash credit, bill discounting, etc. They also give demand and demand and term loans to all types of clients against proper security. Credit creation : It is most significant function of the commercial banks. While sanctioning a loan to a customer, a bank does not provide cash to the borrower Instead it opens a deposit account from where the borrower can withdraw. In other words while sanctioning a loan a bank

2.

3.

automatically creates deposits. This is known as a credit creation from commercial bank.

Secondary Functions of Commercial Banks

Along with the primary functions each commercial bank has to perform several secondary functions too. It includes many agency functions or general utility functions. The secondary functions of commercial banks can be divided into agency functions and utility functions.
1.

Agency Functions : Various agency functions of commercial banks are 1. To collect and clear cheque, dividends and interest warrant. 2. To make payment of rent, insurance premium, etc. 3. To deal in foreign exchange transactions. 4. To purchase and sell securities. 5. To act as trusty, attorney, correspondent and executor. 6. To accept tax proceeds and tax returns.
2.

General Utility Functions : The general utility functions of the commercial banks include

1. To provide safety locker facility to customers. 2. To provide money transfer facility. 3. To issue traveller's cheque. 4. To act as referees. 5. To accept various bills for payment e.g phone bills, gas bills, water bills, etc. 6. To provide merchant banking facility. 7. To provide various cards such as credit cards, debit cards, Smart cards, etc.

Role of Commercial Banks in Economic Development

The role of commercial banks in economic development rests chiefly on their role as financial intermediaries. In this capacity, commercial banks help drive the flow of investment capital throughout the marketplace. The chief mechanism of this capital allocation in the economy is through the lending process which helps commercial banks gauge financial risk.

Risk

One of the most significant roles of commercial banks in economic development is as arbiters of risk. This occurs primarily when banks make loans to businesses or individuals. For instance, when individuals apply to borrow money from a bank, the bank examines the borrower's finances, including income, credit score and debt level, among other factors. The outcome of this analysis helps the bank gauge the likelihood of borrower default. By weeding out risky borrowers, commercial banks lessen the risk of financial losses. As a result, loans that mature without any problems generate a larger pool of funds for the bank to lend, further supporting economic development.

Individuals
When commercial banks assess risk, they help ensure that loans go to creditworthy borrowers. In turn, borrowers typically use loan proceeds to finance major purchases, such as homes, education and other consumer spending. The effect of commercial bank lending generates economic activity from individuals who now have the necessary funds to finance their own endeavors.

Small Business

Commercial banks also finance business lending in a variety of ways. A business owner may solicit a loan to finance the start-up costs of a small business. Once funded, the small business may begin operations and embark on a growth plan. The aggregate effect of small business activity generates a significant portion of employment around the country. According to the U.S. Census Bureau, businesses employing between one and 19 people accounted for 4.4 million jobs in 2004. In contrast, businesses with more than 20 employees only accounted for 1.2 million in the same year.

Government Spending
Commercial banks also support the role of the federal government as an agent of economic development. Generally, commercial banks help fund government spending by purchasing bonds issued by the Department of the Treasury. Both long and short term Treasury bonds help finance government operations, programs and support deficit spending.

Wealth

 Commercial banks also offer types of accounts to hold or generate individual wealth. In turn, the deposits commercial banks attract with account services are used for lending and investment. For example, commercial banks commonly attract deposits by offering a traditional menu of savings and checking accounts for businesses and individuals. Similarly, banks offer other types of timed deposit accounts, such as money market accounts and certificates of deposit. Some investors use these interest bearing, low risk accounts to hold money for investment purposes, waiting for attractive investment opportunities to materialize