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Academic Script Origin and Growth of Commercial Banks in India Commercial Banks are very important component of the money market. They play a very important role in Indian Financial system. Indian banking industry is regulated by Reserve Bank of India. Commercial Bank act as Intermediaries because they accept deposits from savers and lend these funds to borrowers. They act as a facilitating agent. Students, let’s begin with Introduction. Introduction: Commercial Banks is financial Institution that accepts deposits for the purpose of lending. In other words, commercial Banks provide services such as accepting deposits, giving business loans and also allow for variety of deposit accounts. They collect money from those who have it to spare and lend to those who require it. Commercial Bank is a banker to the general public. Commercial Banks are registered under prevalent Indian companies Act, and are also governed by the Indian Banking Regulation Act, 1949. Definitions: Various definitions of a bank have been given by various authors. Some important definitions of a bank listed below. According to the Indian Companies (Regulation) Act, 1949, “the accepting, for the purpose of lending or Investment, of deposits of money from public, repayable on demand or otherwise and with drawable by cheque, draft, order or otherwise.” According to Prof. Kinley, “A bank is an establishment which makes to individuals such advances of money as may be required and safety made, and to which individuals entrust money when not required by them for use.”
According to John Paget, “Nobody can be a banker who does not (i) take deposit accounts (ii) take current accounts, (iii) issue and pay cheques, and (iv) Collect cheques- crossed and uncrossed for its customers.” In short, we can say that banks are not merely traders in money but also in an important sense manufacturer of money.
Structure of Commercial Banks in India The pictorial representation of structure of commercial banking in India is given herewith:
Commercial banks are basically of two types. 1. Scheduled banks 2. Non- scheduled banks.
Scheduled Banks:
Scheduled banks are those which have been in II schedule of Reserve Banks of India act, 1934 and fulfill the criteria’s listed. 1. Minimum paid up capital Rs. 5 lakhs. 2. It must be a corporation as co-operative society. 3. Any activity of bank will not adversely affect the interest of depositors Scheduled banks consist public sector banks, private sector banks, foreign banks, and regional rural banks. Scheduled Banks includes: Private Sector Banks, Public Sector Banks and Foreign Banks.
Let’s learn more about them. 1)
Public Sector Banks:
Public banks are those in which 50% of their capital is provided by central government, 15% by concerned state government and 35% by sponsored commercial banks. In India, there are 27 public sector banks. They includes the state bank of India and its 6 associated banks such as state bank of Hyderabad, state bank of Mysore etc. and 19 nationalised banks and IDBI banks Ltd.
2)
Private Sector Banks:
Private Banks are those in which majority of share capital kept by business house and individuals. After the nationalisation, entry of private sector banks is restricted. But some of private banks continued to operate such as Jammu & Kashmir bank Ltd. To increase the competition spirit and improve the working of public sector banks, RBI permitted the entry of private sector banks in July, 1993.
3)
Foreign Banks:
Foreign banks are those which incorporated outside India and open their branches in India. Foreign banks performed all the function like other commercial banks in India. They offer different types of products and services such as offshore banking, online banking, personal banks etc. Foreign banks also provide special types of credit card which are nationally and internationally accepted. These banks earn lots of profit and create new ways of investments in the country.
4)
Regional Rural Banks:
Regional rural banks were established in 1975 with mandate to ensure sufficient credit for agriculture and rural sector. RRB’s are jointly owned by government of India, concerned state government and sponsor bank. The capital share being 50 %, 15% and 35% respectively. NABARD control and prepare the policies for Regional Rural Banks. The basic objective of establishing RRB’s in India was to provide the credit to rural sector especially the small and medium farmers, artisans, agricultural labour and even small entrepreneurs.
Non Scheduled Banks: Non scheduled banks in India define in clause (C) of section 5 of Banks regulation Act 1949. Non scheduled banks are those which are not a schedule bank and their paid up capital and reserves are less than Rs.5 lakh and are not included in the 2nd schedule of the Reserve Bank of India Act, 1934.
Students, lets now focus our discussion over functions of commercial banks. Functions of Commercial Banks 1.
Accepting Deposits: Accepting deposits is one of major function of
commercial bank. It is the business of bank to accept deposits so that he can lend it to other and earn interest. Basically, the money is accepted as deposit for safe keeping. Banks also pay interest on these deposits. To attract depositors banks maintain different types of accounts. Listed are the deposits. a) Fixed Deposit Accounts: The account which is opened for fixed period by depositing amount is known as fixed deposit account. The money deposited in this account cannot be withdrawn before expiry of period. A high rate of interest is paid on fixed deposits. b) Current Deposit Account: Current deposit accounts are mostly opened by businessmen and traders who withdraw money number of times a day. Banks does not pay interest on these types of account. The bank collects certain charges from depositors for services rendered by it. c) Saving Account: Saving account is most suited for those people who want to save money for future needs. This type of account can be opened with a minimum initial deposit. A minimum balance has to be maintained in account as prescribed by bank. Some restrictions are imposed on depositor regarding number of deposit withdrawal and amount to be withdrawn in given period. d) Recurring Deposit Account: The purpose of these accounts is to encourage public for regular saving, particularly by fixed income group. Fixed amount is deposit is deposited at regular intervals for a fixed term and repaid on maturity.
2. Grant of Loans and Advances: Besides accepting deposit, the second most important function of commercial bank is advancing of loan to the public. After keeping certain part of deposits received by bank as reserve and the rest of balance given as loan. The different types of loan and advances are given by bank are listed herewith: a) Call Money: There are generally short term credit that range from one day to fort night. There are even one night call money advances made available to bank with the help of this market. The rate of interest depends upon the conditions prevailing in money market. b) Overdraft: In over draft, a customer can withdraw money from his current account and available balance below zero. When the amount withdrawn is within the authorised limit then rate of interest charged at agreed rate. Overdraft is allowed normally against the security of negotiable Instrument and credit worthy customers without security. c) Cash Credit: In cash credit, Bank advance loan against the customer current asset or personal guarantee. The borrower has option to withdraw the funds as and when required to extent of his needs but he cannot exceed the credit limit allowed to him. The cash credit limit depends on the debtor’s need and as agreed with the bank. The bank charges interest only on money withdrawn from by them. d) Discounting of Bills: Under this type of lending, Bank pay amount before due date of bill after deducting certain rate of discount or commission. The holder of bill gets money immediately without waiting for the date of maturity. If bill of exchange dishonored on due date the bank can recover the amount from the customer.
e) Direct Loan: A loans granted for a fixed maturity period more than one year. Loans are usually secured against some collateral security. The borrower can withdraw entire money through cheques. The interest is charged on entire amount of loan. Repayment of loan either in installments or in lump sum.
3.
Credit Creation:
Credit creation is also an important function of commercial Bank. The process of credit creation is automatically performed when bank accept deposits and provide loans. Prof Sayers says, “Banks are not merely supply of money but in an important sense, they are manufacturers of money”. In this process, customers deposit their money in bank. Bank keeps certain amount of deposit as cash reserve and rest of balance given as loan and advances. Banks are not required to keep the entire deposits in cash. The amount of loan is not directly given to borrower. The borrower opens an account and then bank deposit money in that account. Here, bank’s lends money and process of credit creation starts.
The functions we just discussed where primary functions of commercial banks. Let us discuss the secondary functions of commercial banks 4. Secondary Functions:- The secondary functions of commercial banks are listed herewith: a. Sale and Purchased of Securities: On the behalf of customer, commercial bank sale and purchase of the securities of private companies as well as government securities.
b. Transfer of Funds: Commercial Bank also provide facilities to transfer funds from one place to another place in form Bank draft, cheques, mail transfer etc. c. Collection and Payment of Credit Instrument: Commercial Bank collect and make payment on behalf of their customers Commercial Bank collect and pay negotiable instruments and also pay rent, income tax fees, insurance premium etc. d. Locker Facility: Commercial Banks provides locker facility to their customers. We can keep gold, silver and important documents in locker at an annual cost to be paid to the bank. e. Letter of Credit: Letter of credit certified the credit worthiness of their customers which issued by commercial banks. f. Collection of Information: Commercial Banks also collect the information relating to Industry, trade, commerce which made available to their customers. g. Traveller’s Cheque ad Credit Card: Commercial Banks issue traveller’s cheques and credit cards to their customers. They can travel without fear of theft and loss of money. Credit card is used to make payment for purchases so that individual does not have to carry cash. h. Foreign Exchange: Commercial banks provide facility to their customers dealing in foreign exchange. Commercial Banks are authorised dealers in India. i. Issuing of Gift Cheques: Commercial Banks issues the gift cheques like Rs 11,51, 101,501 etc. j. Educational Loans: Commercial Banks also provide educational loan to student for higher studies at reasonable rate of interest.
k. Consumer Finance: Commercial Banks provide consumer finance facility for purchase consumer durables like televisions, refrigerators etc. l. Automated Teller Machine: Now a days with the help of ATM, we can deposit or withdraw money from our account any time. Students, let’s turn our discussion towards nationalisation of banks in India.
Nationalisation of Commercial Banks: The role of public sector banks increased after nationalisation of commercial banks. On 1st July 1955, the government of India took over imperial Bank of India and converted it into the State Bank of India. In India, the major nationalisation of commercial banks was done in July 1969 by Prime Minister Mrs Indira Gandhi. 14 Commercial banks were nationalised in July 1969. In April 1980, 7 more bank were nationalised.
Need for Nationalisation of Commercial Banks The needs for nationalisation of Commercial Banks are listed below. 1. Commercial Banks provided loans to large scale Industries and neglected priority sectors. 2. Before the nationalisation financially strong Bank ignored RBI Directives which adversely effected RBI monetary policy. 3. To remove the fear of bank failures from the minds of people. 4. To keep means of generating wealth in public control. 5. To remove regional imbalances and ensure even distribution of banking facilities. 6. To prevent unfair credit distribution by commercial bank
Advantages of Nationalisation of Commercial Banks Some of the advantages of Nationalisation of Commercial Banks are listed: 1. To Check on Creation of Industrial Monopoly: Before nationalisation of commercial banks credit was concentrated to few hands and this formed Industrial Monopoly. No person except big Industrialist could get loan and advances. This neglected the other smaller industrialist. So, commercial banks were nationalised to curb the monopolizing tendencies. 2. Credit Facility to Priority Sector: Agriculture sector is backbone of India. This sector was neglected at that time. There was no credit facility available to agriculture sector before nationalisation. 3. Reduction of Regional Imbalance: Regional imbalances had existed in India for a long time in area of banking facilities. After nationalisation, branches opened in backward states like Assam, Bihar, Uttar Pradesh than in developed states like Gujarat, Tamil Nadu etc. These banks reduced the Regional Imbalances. 4. Collection of Saving: Before the Nationalisation, the banks did not attract more saving from public. Because people did not trust banking system. But After nationalisation of commercial Banks, the deposits were increased. Because public believed in public sector Bank then private sector Banks. 5. To check on Black Money: In order to avoid income tax, people kept money with banks. For the solution of this problem the banks were nationalised.
6. Economic Growth: Before nationalisation of banks, economy of country was not growing due to antisocial practices, speculation and hoarding. The country’s economy suffered badly. In order to solve this problem banks were nationalised. 7. Export Promotion: Commercial Banks also promotes export. Because there is need to promote export for earn Foreign exchange. So, Banks give Finance to Exporter at concessional rates. 8. Promote Small Scale Industry: Nationalised commercial Banks encouraged small scale Industry by granting Loans. These banks grant short term and long term loan to purchase machinery and equipment.
Disadvantages of Nationalisation of Commercial Banks 1. Low performance: The biggest problem of nationalised banks has been their low performance. Banks are required to keep minimum capital to risk asset ratio which known as capital adequacy ratio. It should be 9%.Most of public sector banks had negative ratio. Only four banks maintained ratio during 1999-2000. 2. Favouritism: Another limitation of commercial banks was favouritism in granting loan. They harass certain small industrialist and same time banks grant loan to big industrialist on easy terms and conditions. They follow the policy of partiality which affected the trust of client in banks working. 3. Unbalanced Distribution of Credit: In initial years, Agriculture sector got priority and other sector were neglected. Bank do not advance loan to weaker section such as labourers, worker and small trader due to lack of security.
4. Financial Crisis: After nationalisation, some banks were operating under losses .This is because banks advance loan without adequate security which lead to accounts/loans becoming non-performing assets for banks. The recovery of loan was poor which lead to losses. This is main reason for failure of banks. 5. Political Interference: Another limitation of nationalised commercial banks was increasing the political interference in granting loans, appointment of banks personnel, opening of new branches etc. 6. Inadequate Facilities: Nationalised commercial banks have failed to provide adequate facilities and services to population living in rural and sub urban area. Banks failed to mobilise rural deposit.